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Express Scripts Holding Company (ESRX): Ready To Curve Into The Gap

 January 10, 2013 05:37 PM

(By Rich Bieglmeier) iStock went gap hunting today, looking for stocks that recently gapped down, for whatever reason, and are in the doorway, potentially ready to fill the gap. Express Scripts Holding Company (ESRX) fell down in early November on earnings that disappointed Wall Street. ESRX shares fell from a close of $62.88 on November 5, 2012 to $55.15 the next day. The NASDAQ 100 member's stock continued to drift lower, eventually settling on a recent closing low of $50.05 on November 14, 2012.

ESRX has been bobbing along its declining 50-day moving average for the past six trading days; however, bulls didn't have the courage to yank shares convincingly above the key benchmark until today.

[Related -Express Scripts Holding Company (ESRX): Should You Own ESRX in 2014?]

The small leap forward and away from the 50-day have shares turning the doorknob and ready to move into the open chamber. If shares can get to the better side of $56.17, then traders could kick the door down a color in the gap with green gains, with upside to $62 to finish the job.

Moving forward, the company told the JPMorgan Global Healthcare Conference that some potential catalysts are ahead. One of which is the cost of drugs. The price curve is expected to turn higher in 2013 and 2014 after flattening out in recent years. More than 600 new drugs coming to the market is one of the primary reasons the price curve will turn higher. Higher drug costs will likely have drug buyers looking for alternatives and Express Scripts should be a major beneficiary serving a third of the US population. 

[Related -Can Abbvie Inc (NYSE:ABBV) Trump Gilead Sciences, Inc.'S (NASDAQ:GILD) HCV Lead?]

Management also believes the push to lower healthcare costs positions ESRX to profit from Obamacare. One of the biggest costs is pharmacy related waste. More than $400 billion a year is flushed down the toilet – sometimes literally. The three primary causes are not taking a generic when available, not using the most cost-effective pharmacies, and not taking medicine as prescribed.

The CBO recognizes the waste and accounts for it as adherence. Studies show that home delivery improves adherence by at least 20%, according to the pharmacy benefit manager's (PBM) presentation. That's a lot of savings. To address the issue of adherence, ESRX is data mining from their client database to identify at risk, non-adherers and help to help these folks make "better decisions." With so much money at stake, we'd expect PBMs to find a happy home within the Affordable Health Care Act.

While the company is situated to profit from demographics and legislation, costs from integrating the Medco Health Solutions merger could hamper EPS in the near-term; although, management says they are making a lot of progress on this front.

If management delivers the goods during their next quarterly checkup, then Express Scripts could improve on some valuations that currently trade at a discount compared to five-year averages. ESRX's price-to-book of 1.985 and price-to-sales of 0.572 have some catching up to do to get back to their five-year averages of 9.72 and 0.68, respectively.

Overall: Short-term traders might take an interest in Express Scripts Holding Company (ESRX) when it enters the gap down chamber above $56.17. Longer-term, Express should benefit from an aging population and the desire to contain the cost of drug prices, which are expected to trend higher in the year ahead.



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