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Express Scripts

Express Scripts. Ian Johnston. ESRX Background. PBM – Processes prescriptions for groups that pay for drugs (insurance companies or corporations) Services Processing prescriptions Mail-order pharmacy Negotiating lower prices with drug makers and sellers Formulary management

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Express Scripts

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  1. Express Scripts Ian Johnston

  2. ESRX Background • PBM – Processes prescriptions for groups that pay for drugs (insurance companies or corporations) • Services • Processing prescriptions • Mail-order pharmacy • Negotiating lower prices with drug makers and sellers • Formulary management • Pass on cost savings to customers and take a cut

  3. Presentation outline • Determine value of an equity share based on forecasts and market value of debt • Determine sensitivity of forecast to changes in cost of capital and growth rate assumptions • Examine analyst forecasts and compute: • Equity value of a share • Imputed assumptions in analyst forecasts

  4. Equity Value Determination • Market value of debt (Note 7) = $11,947 • Estimated enterprise value = $55,218 • Adjusted value for date and mid-year • (March 22nd) = $58,547 • Implied equity value = $46,600 • Shares outstanding: 773 million • Intrinsic value of stock = $60.28 • Trading at $76.99 as of Friday • Assumptions • Sales growth: 7% • EPM: 2.5% • EATO: 3.5

  5. Sensitivity Analysis • Purpose • Examine changes in assumptions to test the significance of each variable • Determine which variables have the greatest effect on enterprise value • Variables chosen • Discount rate • Growth rate

  6. Sensitivity Table • Stock price at March 21st: $76.99 • Implied enterprise value: $71,460 • Issues: • NEA currently $37,000- some values are less than the liquidation value of the firm’s assets • Caused by negative residual income values (r-ent*NEA > EPAT)

  7. Sensitivity Analysis • Conclusions: • Overall, the firm is overvalued in the market using these assumptions • A modest increase in the WACC would have disastrous effects on the firm’s value • EPM is very low – only 2.5% • Small margin leads to the firm being sensitive to increases and decreases to cost of capital • Distortion effect if cost of capital and growth rate are similar (ex. 7% and 7.45%) • Causes continuing value computation to approach infinity

  8. Are Model Assumptions Too Conservative? • Current assumptions • Sales growth: 7% • EATO: 3.5 • EPM: 2.5% • Market value of equity: $76.99 • Ian value of equity: $60.28 • Next step: look at analyst reports to determine where assumptions differ

  9. ValueLine Method: use EPS, dividends, and book value to value equity and extract implied growth rates

  10. ValueLine Forecast • Book value 2013: $28.25 • Dividend discount model cannot be used- no dividends have been/will be declared • Turn to Residual Income Model

  11. Equity Valuation using Residual Income

  12. Implied Growth Rates • Step 1: plug in $78.59 for share value and work backwards to solve for g (continuing value growth estimate) • Implied growth in residual income: 6.09% • Step 2: convert growth in residual income to growth in earnings/sales • 1+g(RI) = (CI(t+1) – r*CSE(t)) / RI(t) • CI(t+1) = $6.27 • $6.27 / $5.69 = 10.22% sales growth • Conclusion: ValueLine used a long term growth estimate of 10.22% for sales

  13. Conclusion ValueLine and other analyst assumptions for ESRX’s long term growth are very high My estimate of 7% seems more appropriate for the long term ESRX seems to be highly overvalued based on the sales growth rate implicit in the stock price

  14. Questions?

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