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Express Scripts Only Looks Cheap

Express Scripts won’t be as attractive when it loses its largest customer Anthem.

And Express Scripts unveiled third-quarter results on Tuesday evening that gave shares a boost. Adjusted earnings of $1.90 a share met analyst expectations, while revenues of $24.7 billion missed. Express Scripts increased the low end of its full-year profit forecast to $6.97 a share from $6.95. The stock closed 4% higher Wednesday.

But a closer look suggests the stock is cheap for reasons that are unlikely to soon change.

The company’s stock won’t be as attractive when Express Scripts loses its largest customer, the health-insurance giant Anthem . Anthem was responsible for 31% of Express Scripts’ adjusted earnings before interest, taxes, depreciation and amortization in the third quarter.

That customer is set to become a competitor. Anthem announced it will form its own pharmacy-benefit manager once the contract ends in two years. So next year’s earnings forecasts are of limited use for investors.

Generating growth will be a challenge, even after ignoring the Anthem loss. The company is targeting annual adjusted Ebitda growth of 2% to 4% a year in its core business through 2020. Total third-quarter claims were down 1% from a year ago. Even an announced customer retention for next year above 95% isn’t as impressive as it sounds. Most contracts last longer than a year, and Express Scripts had forecast client retention of 95% to 98% back in April.

The competitive picture could darken farther. Express Scripts Chief Executive Tim Wentworth addressed “recent speculation and rumors about potential disruption” in the industry on Wednesday’s conference call. While he reiterated confidence in the business model, investors are indeed worried Amazon.com will soon enter the pharmacy business. Amazon has made no announcement on the topic.

And unlike rivals like CVS Health or UnitedHealth Group , Express Scripts is a pure stand-alone pharmacy-benefit manager. The company is now working to diversify itself—Express Scripts announced the acquisition of medical-benefit manager eviCore for $3.6 billion earlier this month. That deal is expected to be accretive to earnings next year after it closes, but it is unclear by how much.

Employee turnover in key roles, meanwhile, is an issue. Express Scripts announced that James Havel would become finance chief effective Wednesday. He is the fifth CFO since 2012. The company also faces a slew of government inquiries into topics such as drug pricing and the opioid crisis, including two new investigations from state attorneys general revealed in the company’s latest quarterly filing with the Securities and Exchange Commission.

Winning investors back won’t be easy. And doing so will take more than a low earnings multiple.


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