What Investors Aren't Seeing In Express Scripts
Investing can be "terrifying," especially when dealing with growth stocks, Cramer said Monday. When one of these stocks stall, investors fear the momentum is gone and will want to cut their losses.
That's what happened to Netflix after it reported earnings June 21, Cramer noted. The stock dropped from $119.65 before the quarter to an intraday low of $95.53 on July 28. Investors became worried and left the stock, he said. Netflix is one of Cramer's C.A.N.D.I.E.S. — what he thinks are now the powerful growth names. On July 26, he reviewed the latest quarter of all of these companies, except for Express Scripts because it hadn't reported yet. After doing so, he determined that Netflix is still a buy because its underlying subscription story is still intact and its stock has since soared from $102.79 to $116.51.
It now seems that what happened to Netflix's stock is happening to Express Scripts, Cramer said. It has sold off, even though it reported a strong quarter that beat expectations. After the close on July 28, the company reported that earnings beat expectations by 1 cent on revenues that rose 105% year over year. At the same time, the health care company raised the lower-end of its guidance. Investors immediately sold off and even though the stock has recently started to come back, it is still down more than 12% from its high of $53.27.
"When you look at the chart of a stock that’s surged over the past year, it never goes straight up," Cramer said. "There are always some pullbacks from people taking profits, or people misreading a quarter."
Those pullbacks, Cramer added, look like "little blips" when one looks at the chart year-after-year. They might feel "terrifying" when you're in them, he acknowledged, but said it's the wrong reaction to have. He thinks this stock has made money managers a lot of money over the past decade — 1030% return to shareholders, including dividends, over the past ten years.
Cramer likes Express Scripts because it's a pharmacy benefit manager, meaning it's a company that runs prescription drug plans. It uses bargaining power to get lower prices for customers and pockets the difference to turn a profit. The St. Louis, Miss.-based company, along with Medco, has 18% market share. This company's strength, Cramer said, is in generic drugs because it makes money when branded drugs go off patent. In the next four years, $100 billion worth of branded drugs will lose patent protection and Cramer thinks that will help increase the company's bottom line.
Fears about Express Scripts have been overblown, Cramer argued. Concerns about pricing in new contracts thanks to increased competition from CVS Caremark . Some analysts fear Express Scripts won't be able to maintain decent pricing because some customers might not renew contracts. Cramer points out that pricing pressure from CVS can't outweigh the momentum from the increase in generic drugs and furthermore, Express Scripts had a 95% retention rate for existing clients in the latest quarter.
Express Scripts will be able to cut costs thanks to its $4.7 billion acquisition of NextRX, which closed in December of last year, Cramer said. This deal gives the company a 10-year exclusive contract with Wellpoint , which is a giant health care provider with more than 33 million members. ESRX expects the acquisition will generate more than $1 billion in incremental earnings before interest, taxes, depreciation and amortization once its fully integrated. Management expects to be fully integrated in up to 18 months.
"Express scripts has been a broken stock, but it is absolutely not a broken company," Cramer said. "I expect ESRX to return to its long-term record of stellar outperformance."
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