Last quarter, Express Scripts (NASDAQ:ESRX) CEO George Paz made news when he gave a bleak outlook for the economy even though his company achieved good results. Three months later, the giant pharmacy benefits management company has another solid quarter. However, this time Paz isn't nearly as negative.
Shares opened nearly 5% higher on Tuesday following the company's earnings announcement, although the gains were pared somewhat in early trading. What happened to the doom and gloom? Let's take a look.
Solid numbers yet again
Express Scripts reported fourth-quarter earnings of $504.1 million, up from $290.4 million in the same quarter of 2011. Those numbers reflect $0.61 and $0.59 per diluted share, respectively. The company reported adjusted earnings of $1.05 per share, slightly better than the average analyst expectation of $1.04 per share compiled by Thomson Financial Network. Fourth-quarter revenue came in at $27.4 billion, up from $12.1 billion year-over-year.
For the full year, Express Scripts announced earnings of $1.31 billion, or $1.76 per diluted share. That compares to 2011 earnings of $1.28 billion, or $2.53 per diluted share. Full-year revenue for 2012 was $93.9 billion versus $46.1 billion in 2011.
All comparisons between 2012 and 2011, whether for the fourth quarter or for the full year, were affected by the acquisition of Medco in 2012. The numbers that looked much better in 2012 -- and much worse -- directly resulted from the integration of the two companies.
Doomsayer to boomsayer?
The fourth-quarter numbers were good, but what really fired up the market was Express Scripts' outlook for 2013. The company provided adjusted earnings guidance of $4.20 to $4.30 per share, reflecting up to 15% growth over 2012. Analysts were expecting earnings at the low end of that range.
Last quarter, George Paz stated that many of the company's clients had "unprecedented concern" about the economy. He went on to say that analysts' estimates for Express Scripts' 2013 earnings were "overly agressive." Now, he gives earnings guidance higher than what analysts were expecting. His comments on the earnings call Tuesday were that he and the management team "are bullish on the PBM industry" and "confident of our position in the rapidly changing health care environment."
Was Paz just pulling the old college football trick of poor-mouthing a few months ago? Maybe, but I don't think so. I suspect he was simply relaying what he believed based on feedback he was hearing at the time. UnitedHealth (NYSE:UNH) CFO David Wichmann stated in January that his company expected high unemployment levels to persist and result in lower revenue for its commercial business. Wichmann's concerns weren't too different than the ones Paz voiced.
The key here isn't that Express Scripts is now overly optimistic about the economy. It isn't. Paz reiterated in his comments on Tuesday that there is "a tremendous amount of uncertainty" and that the company is assuming that the weak economic conditions continue. However, he focused on Express Scripts' ability to succeed despite economic headwinds.
One particular area of opportunity noted was with Medicaid. Express Scripts' largest customer, WellPoint (NYSE:ANTM), should benefit from expanding Medicaid enrollment. This growth could help Express Scripts. Paz indicated that he has not yet spoken with WellPoint's new CEO, Joseph Swedish, but looks forward to doing so.
Another potential growth area mentioned was with health insurance exchanges, or HIEs. Paz didn't think that HIEs would necessarily be a big factor in 2013. However, he sees promise for Express Scripts in the future as individuals in these exchanges seek to lower drug costs.
Express Scripts' solid quarterly results and better-than-expected guidance aren't really surprising to me. CVS Caremark (NYSE:CVS), which operates the second-largest PBM, already reported strong quarterly results and gave a positive outlook for 2013. Although a significant portion of the company's business comes from its chain of pharmacies, its PBM revenue was up 17% year-over-year. That earlier announcement seemed to bode well for Express Scripts -- and it ultimately did.
The PBM industry as whole stands to benefit from continued focus on controlling prescription drug costs. Changes in the health-care landscape such as HIEs actually highlight the value of PBMs. I think that with its operational scale and research into ways to hold down costs, Express Scripts is best-positioned to prosper. Where's the doom and gloom? I don't see any with this stock.