Sunday, February 16, 2014

Bought Express Scripts (ESRX)

Had my eye on this for a while; bought because it did not fall when the indexes corrected (22nd Jan to 5th Feb), and the correction is (hopefully) over:

Bespoke Investment also notes that the Drugs and Biotech has been the strongest industry group since the start of tapering (mid Dec), and Healthcare is one of the strongest sectors in the February's post-correction bounce.

  • ESRX is the largest Pharmaceutical Benefit Manager in the US.  Their business is to act as a middleman between doctors, patients, pharmacies, insurers and employers, to increase efficiency and cut costs (e.g.: by asking a patient's doctor to switch to cheaper generic drug).  ESRX had a 30% share of PBM industry (more after the Medco merger), and 60% of mail order market share.  Their size gives them some competitive advantage against suppliers.
  • Valuation: Although sporting an estimated forward PE of 33, it has a high amortization of intangibles.  2012 income was 1.3bn, amortization for "customer related intangibles and non-compete agreements" was 1.4bn, CFO was 4.7bn.  Morningstar has target price considerably higher than the current one.
  • Risks: Pharmaceutical distribution is a changing industry: The PBMs' roles change over time (from filling out paperwork, to recommending generics, to handling specialty drugs); their previous roles become commoditized.  Contracts with customers (insurers and employers) are renewed every 3-4 years.  The market structure also changes, e.g.: the move to exchange-based health plans vs employer based ones may cut PBM's margins.  ESRX's pricing and profitability is not transparent.  This is a complex and rapidly changing business, definitely not a Buffet-like stock to hold forever.
  • Other information:
Bought 360 shares at $75.77 on 13/Feb/2014.  Total cost USD 27,312.  This is a trade: A strong stock, in a strong segment, in a (hopefully) rising market.


This is currently my only position, I am still 95% in cash.  I may trade a little, or try to buy some reasonably priced stocks in the meantime, but am still waiting for a steep market market decline before I am comfortable with serious buying.

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