Express Scripts Holding Company (NASDAQ:ESRX) was the second most popular healthcare stock among hedge funds in the fourth quarter of 2012, right behind Pfizer Inc. (NYSE:PFE), according to our database of 13F filings (see the full top ten list of popular healthcare stocks). Billionaire Leon Cooperman’s Omega Advisors increased its stake by 38% during the quarter to a total of 2.7 million shares (check out Cooperman’s stock picks) while Maverick Capital, managed by Lee Ainslie, reported owning 5.1 million shares at the end of December (find Ainslie’s favorite stocks). Brookside Capital, a hedge fund arm of Bain Capital, moved heavily into the $49 billion market cap pharmacy benefit management company as well.
Now Thomas Mac Mahon, a Board member at Express Scripts Holding Company, has bought 5,000 shares of the company’s stock at an average price of $59.58 per share, according to a filing with the SEC. He now owns over 38,000 shares of the stock, meaning that this most recent purchase increased his holdings by about 15% in percentage terms. Studies show that stocks bought by insiders tend to slightly outperform the market (read our analysis of studies on insider trading). We think that this is because it is actually rational for insiders to diversify their wealth away from the company and realize the benefits of diversification unless they are confident enough in the stock price to ignore the increase in company-specific risk.
Express Scripts has settled its dispute with Walgreen Company (NYSE:WAG) and business has been booming at both companies relative to a year ago as a result (though of course this is more of a catching-up process than it is sustainable growth). The company reported large increases in revenue and earnings in its most recent quarter compared to the same period in the previous year as a result. Earnings per share have also continued to rise on a q/q basis, though the rate of increase is slowing. Express Scripts trades at 34 times trailing earnings; if we annualize only the fourth quarter of 2012, we get a P/E multiple of 14. Wall Street analyst expectations for 2014 imply a forward P/E of 12. If the company is able to achieve that target, very little sustainable growth would be required in order for it to be a good value. There have been some concerns that CVS Caremark Corporation (NYSE:CVS) was able to increase its market share during the battle between Express Scripts and Walgreen’s and would be able to maintain that advantage, but those do not seem too worrisome at this time.
The closest publicly traded peer for Express Scripts Holding Company is Catamaran Corp (NASDAQ:CTRX). Catamaran’s stock price is up 47% in the last year, which has brought it to generally high earnings multiples. The company has been growing rapidly but still trades at 22 times forward earnings estimates- so it will need to improve at a considerably faster rate than Express Scripts after that point, assuming that it even meets the Street’s goals. Recent growth rates have been high enough, however, that investors should look into how likely continued growth might be and possibly consider Catamaran as a growth stock.
Express Scripts is doing well at building its business back up, and if we look at last quarter’s results- though obviously such a short time frame is prone to error- the valuation does not look too expensive. Given the insider purchase as well we certainly think that investors should be watching for the next quarterly report even if they are not willing to do more research on the company at this time. If there is a decent amount of secular growth occurring in addition to the recovery of its former business, then it might be a good value considering the multiples on more recent earnings numbers.
