Wednesday, September 05, 2007

Express Scripts (NASDAQ:ESRX): Recent highs in play?

- Cowen & Co is out with a very positive call on the PBM industry saying profitability will continue to benefit from a significant increase in the mix of higher- margin generic drugs dispensed to the clients. In addition, the PBMs should benefit from smaller increases in the mix of dugs dispensed through their mail pharmacies. As a result, consensus 2008 EPS growth estimates for Express Scripts (NASDAQ:ESRX) and Medco Health (NYSE:MHS) Solutions are 18% and 21%, respectively. The firm is upgrading MHS to Outperform from Neutral.

My focus remains with ESRX, the number three pharmacy benefit manager (PBM) in the U.S as Cowen maintains their 2007E EPS of $2.30 (+39%), which is slightly above consensus of $2.28 (+38%) but raises 2008E EPS from $2.80 (+22%) to $2.90 (+26%), which is 8% above consensus of $2.69 (+18%).

According to the firm, the increase in their 2008 adjusted claims estimate adds $0.05 to EPS while increased share repurchase activity ($750MM v. $350MM previously) accounts for the balance. Firm thinks the stock can outperform the market by 20% over the next twelve months.

Notablecalls: With MHS upgraded to Outperform, I think ESRX will also see buy interest, based on Cowen's uber-positive view on the PBM industry. Cowen's new FY08 EPS estimate for ESRX stands now at an absolute Street high. I'm sure the upgrade on MHS will propel the shares to a new 52-week high (technical breakout) and ESRX will track that performance, putting recent highs in play.

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