After falling more than a percent on Monday after market close, when Express Scripts (NASDAQ:ESRX) first reported third-quarter results, shares are trading more than a percent higher today. The shaky market response follows a surprising year-over-year decline in revenue despite better-than-expected earnings per share. Here's what investors need to know.

Image source: Express Scripts.

Express Scripts results: The raw numbers

 

Q3 2015 Actuals

Q3 2014 Actuals

Growth (YOY)

Sales

$25.2 billion

$25.8 billion

(2.3%)

Net Income From Continuing Operations

$661.7 million

$582.3 million

13.6%

Adjusted EPS

$0.97

$0.78

24%

What happened with Express Scripts this quarter?

  • Express Scripts' year-over-year revenue decline during the quarter was out of the ordinary, but so was its impressive 24% year-over-year gain in adjusted EPS. Ahead of Q3, Express Scripts' revenue was growing by about 1%, year over year, and its EPS was growing at year-over-year rates below 20%.
  • The company boosted its full-year outlook for adjusted EPS from a range of $5.46 to $5.54 to $5.51 to $5.55.
  • Express Scripts continued to benefit from scale and pricing power, with its gross profit margin increasing from 8% in the year-ago quarter to 8.6% in Q3. This is also up from its gross margin of 8.4% reported during Q2.

What management had to say
"With the rising cost of prescription drugs, we are continuing our mission to make medicine more affordable and accessible for clients and patients," said Chairman and CEO George Paz in the company's third-quarter press release. More than a cliche, its "mission to make medicine more affordable and accessible" is actually in alignment with driving shareholder returns, as its scale enables Express Scripts to wield pricing power with suppliers, access formidable distribution networks, and drive prices as low as possible -- the very advantage that keeps it ahead of competitors.

"Our innovative solutions, focused scale, specialized care and unmatched leadership manages cost more favorably for payers while improving health outcomes of our patients," Paz bragged.

President Tim Wentworth reaffirmed to investors the company's competitive advantage is intact: "It is clear that our unique collection of cost-saving solutions and our business model of client alignment position us well for continued growth."

Looking ahead
While the company's year-over-year gains in EPS, driven by improving scale and a share repurchase program, make it easy for investors to forgive falling revenue, they should keep an eye on the top line in the coming quarters to decipher whether this decline could become a secular trend.

Furthermore, the reported 24% boost to its EPS during the quarter is not likely sustainable. Investors should keep this in mind -- especially in light of the company's premium price-to-earnings multiple of 28. Look for lower growth in EPS in the coming quarters as Express Scripts' year-over-year comps for its improving gross profit margin get tougher. But also maintain high expectations for more double-digit EPS growth -- just not as high as 24%.

Daniel Sparks has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Express Scripts. Try any of our Foolish newsletter services free for 30 days. 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 has a disclosure policy.