John Reese, editor of Validea, selects stocks for his model portfolio based on the investing strategies of well-known, top-performing advisors; Express Scripts Holding Company (ESRX) has been added to the portfolio based on the growth strategy of famed fund manager Peter Lynch.
Express Scripts is a pharmacy benefit management (PBM) company. It is engaged in providing healthcare management and administration services to its clients, including managed care organizations, health insurers, third-party administrators, employers, union-sponsored benefit plans, workers' compensation plans and government health programs.
DETERMINE THE CLASSIFICATION:
This methodology would consider Express Scripts a "fast-grower".
P/E/GROWTH RATIO: PASS
The investor should examine the P/E (8.81) relative to the growth rate (47.20%), based on the average of the 3, 4 and 5 year historical eps growth rates, for a company.
This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for Express Scripts (0.19) is very favorable.
SALES AND P/E RATIO: PASS
For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold.
Express Scripts, whose sales are $101,353.2 million, needs to have a P/E below 40 to pass this criterion. The stock's P/E of (8.81) is considered acceptable.
EPS GROWTH RATE: PASS
This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years. This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable.
The EPS growth rate for Express Scripts is 47.2%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered 'OK'. However, it may be difficult to sustain such a high growth rate.
TOTAL DEBT/EQUITY RATIO: PASS
This methodology would consider the Debt/Equity ratio for Express Scripts (72.91%) to be mediocre. If the Debt/Equity ratio is this high, the other ratios and financial statistics for ESRX should be good enough to compensate.
We would also note that in addition to meeting the investment criteria of Peter Lynch, this pharmacy benefit management company scores highly on the models tracking the investing styles of James O'Shaughnessy and our own Validea momentum stock portfolio.
