I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But even I have to admit some growth stories are bogus, hence this regular series.

Next up: Express Scripts (Nasdaq: ESRX). Is this pharmacist the real thing? Let's get right to the numbers.

Foolish facts


Express Scripts

CAPS stars (5 max) ****
Total ratings 644
Percent bulls 93%
Percent bears 7%
Bullish pitches 67 out of 71
Highest rated peers America Service Group, Psychemedics, IPC The Hospitalist

Data current as of Nov. 9.

Fools tend to rate Express Scripts highly, mostly thanks to the size and complexity of the business of delivering health-care services. So long as everyone needs medicine, they reason, investors should do well.

"With health care adding more customers, this giant in the field is set to capture some nice profits," wrote All-Star investor denofhc in September. The stock is up close to 17% since, a solid market-beater.

The elements of growth


Last 12 Months



Normalized net income growth 33.3% 14.4% 25.6%
Revenue growth 90.2% 12.6% 0.7%
Gross margin 6.9% 9.8% 9.3%
Receivables growth 43.7% 118.1% (2.4%)
Shares outstanding 526.2 million 550 million 495.3 million

Source: Capital IQ, a division of Standard & Poor's.

Can the rally continue? As this table shows, there are strong trends in the underlying business. Let's review:

  • Revenue growth is accelerating at a blistering pace -- a good sign. What's interesting is the reversal. Revenue isn't just growing fast; it's growing faster than both receivables and normalized net income.
  • Gross margin is a bit more troubling. Expenses related to the integration of WellPoint's former NetRx subsidiary, which the company acquired last year for $4.7 billion, have dragged down margins after a brief uptick last year. During the third-quarter conference call, CFO Jeff Hall told analysts in to expect improvements as integration work is completed, but it could be a while before Express Scripts is earning more than 9% on the top line.
  • But it's shares outstanding where this stock story sings. Express Scripts' $2.5 billion in free cash flow helped fund $1.27 billion in share repurchases.

Competitor and peer checkup


Normalized Net Income Growth (3 yrs.)

Aetna (NYSE: AET) 29.1%
CIGNA Corp. (NYSE: CI) 59.8%
Express Scripts 33.3%
Humana (NYSE: HUM) 34.8%
MedcoHealth Solutions (NYSE: MHS) 12.2%
Rite Aid (NYSE: RAD) Not measurable
UnitedHealth Group (NYSE: UNH) 21.9%

Source: Capital IQ, a division of Standard & Poor's. Data current as of Nov. 9.

This table tells me two things. First, that health services is a heck of a business. Seriously, where else besides software have you seen growth like this? Second, among its peers, Express Scripts is one of the better growers.

What this table doesn't show is the swings in normalized net income. That's why the first table matters. As a growth investor, I prefer businesses with accelerating earnings and cash flow gains. Express Scripts hasn't achieved this. Yet.

Grade: Unsustainable
Perhaps it will at some point. For now, the company isn't showing enough signs of a sustainable growth story.

And even if the valuation is reasonable -- with the stock trading almost in-line with Wall Street's long-term growth projections that seems to be the case -- declining gross margin suggests there's still too much integration work to do. I'd rather wait for management to make good on its promise to boost gross margin than risk betting on the stock too soon.

Now it's your turn to weigh in. Do you like Express Scripts at these levels? Let us know what you think using the comments box below. You can also ask Tim to evaluate a favorite growth story by sending him an email, or replying to him on Twitter.

Interested in more info on Express Scripts? Add it to your watchlist here by clicking here.

MedcoHealth Solutions and UnitedHealth Group are Motley Fool Stock Advisor selections. UnitedHealth is also a Motley Fool Inside Value pick. Motley Fool Options has recommended subscribers open a diagonal call position in UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool owns shares of UnitedHealth Group and is also on Twitter as @TheMotleyFool. Its disclosure policy thinks Monty Python is sustainably funny.