Rx for Value and Growth

08/08/2014 8:00 am EST

Focus: STOCKS

Matthew Coffina

Editor, Morningstar Stock Investor

Matt Coffina of Morningstar maintains a “Tortoise” and a “Hare” portfolio, for those with differing risk tolerance. Here, he looks at what he considers the best current value in the high-growth-focused Hare portfolio.

Express Scripts (ESRX) stock is once again under pressure, apparently because a sell-side analyst lowered her estimate for 2015 earnings per share on concerns about prescription volumes.

Similar worries have been hanging over Express Scripts' stock for months, causing it to badly lag the S&P 500 since around mid-March. However, for patient investors with a long time horizon, I still think Express Scripts offers the most compelling value in the Hare.

Declining prescription volumes in 2014 were largely due to the distractions of the Medco integration, which is in the past.

Express Scripts can now devote its full attention to retaining and winning clients, and it recently hired a new Senior Vice President of Sales and Account Management from Aetna AET.

More importantly, Express Scripts' stock is already pricing in low expectations. The midpoint of management's latest guidance for the current year calls for adjusted earnings and free cash flow of around $4.88 and $5.82 per share, respectively.

That gives Express Scripts a price/earnings ratio of 13.5 and a free cash flow yield of 8.8%. Even low-single-digit annual operating income growth should be sufficient to provide investors with double-digit total returns from this price, and I think Express Scripts can do substantially better than that over the long run.

The stock is also trading at the largest discount to our analyst's fair value estimate of any Hare holding. With the stock market as a whole fully valued, opportunities like this are few and far between.

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