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What's in Store for Express Scripts (ESRX) in Q2 Earnings?

Pharmacy benefit manager, Express Scripts Holding Company ESRX, is scheduled to report second-quarter 2017 results on Jul 25, after market close. This St. Louis, MO-based company is the largest pharmacy benefit manager (PBM) in North America.

Meanwhile, the company’s earnings exceeded the Zacks Consensus Estimate by almost 0.8% in the last reported quarter. The stock has delivered positive earnings surprises in the past four quarters at an average of 0.3%.

Express Scripts’ stock has underperformed the Zacks classified Medical Services industry in the last six months. Specifically, the stock lost 12.1% during this period compared to the industry's gain of 3.7%. Moreover, the current rate is way lower than the S&P 500's 8.8% over the same time frame. This indicates looming concerns ahead.

Express Scripts Holding Company Price and EPS Surprise


Let’s take a look at how things are shaping up prior to the second-quarter earnings announcement.

Factors at Play

Second-Quarter Outlook: For the second quarter of 2017, Express Scripts expects total adjusted claims in the range of $343 million to $353 million. Adjusted earnings per diluted share for the second quarter are estimated in the band of $1.70 to $1.74, representing growth of 8% to 11% on a year-over-year basis. Furthermore, the company anticipates compounded annual EBITDA growth in the band of 2% to 4% from 2017 through 2020 for the core PBM business.

Favorable Macroeconomic Scenario: We expect Express Scripts to continue to benefit from increased generic utilization, shift toward mail orders, strong specialty growth and an aging population in the U.S. Branded drugs are becoming increasingly expensive due to double-digit brand inflation. Thus, continued rise in the price of specialty drugs and increased regulatory burden has been driving demand for generics, a key catalyst for the company.

Cutthroat Competition in Niche Space: On the flipside, Express Scripts faces intense competition in the PBM industry. The company faces competition from independent PBMs like MedImpact and Navitus Health Solutions. Moreover, the niche space is dominated by players like CVS, Aetna and Cigna, among others. We expect intensifying competition to mar second-quarter revenues.

Estimate Revision Trend: Express Scripts’ estimate revision trend lacks luster at the moment. For the current quarter, one analyst moved south, compared to no upward revision in the last two months. In fact, over the last three months, the current quarter estimates declined almost 1.2% to $1.71 per share.

Probable Loss of Biggest Customer: Although it is too early to gauge the losses, Express Scripts is on the verge of losing its biggest customer – leading health insurer Anthem Inc. (ANTM). Following a series of legal conundrum, Anthem is no longer expected to extend its pharmacy-benefits management agreement withExpress Scripts, which is slated for expiration by 2019-end. Per management, Express Scripts might lose almost 50% of its revenues related to the Anthem contract by the second quarter itself.

Earnings Whispers

Buoyed by the above factors, our proven model does not conclusively show that Express Scripts is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to be able to beat estimates. This is not the case here, as you will see below.

Zacks ESP:The Earnings ESP for Express Scripts is -0.59% as the Most Accurate estimate is pegged at $1.70, while and the Zacks Consensus Estimate stands at $1.71. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Express Scripts currently carries a Zacks Rank #3. Though a favorable Zacks Rank increases the predictive power of ESP, the company’s negative ESP makes surprise prediction difficult.

Meanwhile, we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks that Warrant a Look

Here are a few companies you may want to consider as our proven model shows that they have the right combination of elements to post an earnings beat this quarter:

Becton, Dickinson and Company BDX has an Earnings ESP of +0.41% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Align Technology, Inc. ALGN has an Earnings ESP of +1.37% and a Zacks Rank #2.

Stryker Corporation SYK has an Earnings ESP of +0.66% and a Zacks Rank #2.

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