Undervalued Express Scripts FCF/EV Yield 11%, Shareholder Yield 9% – Large Cap 1000 Stock Screener

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One of the cheapest stocks in our Large Cap 1000 Stock Screener is Express Scripts Holding Company (NASDAQ:ESRX).

Express Scripts Holding Co (Express) is a pharmacy benefit manager in the United States. It offers healthcare management and administration services such as managed care organizations, health insurers, workers’ compensation plans and government health programs.

A quick look at Express’ share price history over the past twelve months shows that the price is down 18%, but here’s why the company is undervalued.

The following data is from the company’s latest financial statements, dated June 2017.

The company’s latest balance sheet shows that Express has $2.353 Billion in total cash and cash equivalents. Further down the balance sheet we can see that the company has $1.151 Billion in short-term debt and $13.835 Billion in long-term debt. Therefore, Express has a net debt position of $12.633 Billion (debt minus cash). While some investors may be concerned about the company’s net debt position it’s important to understand the company’s free cash flow position below.

If we consider that Express currently has a market cap of $36.114 Billion, when we add the net debt totaling $12.633 Billion that equates to an Enterprise Value of $48.747 Billion.

If we move over to the company’s latest income statements we can see that Express has $5.324 Billion in trailing twelve month operating earnings which means that the company is currently trading on an Acquirer’s Multiple of 9.15, or 9.15 times operating earnings. That places Express squarely in undervalued territory.

The Acquirer’s Multiple is defined as:

Enterprise Value/Operating Earnings*

*We make adjustments to operating earnings by constructing an operating earnings figure from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that these earnings are related only to operations.

It’s also important to note that if we take a look at the company’s latest cash flow statements we can see that Express generated trailing twelve month operating cash flow of $5.811 Million and had $277 Million in Capex. That equates to $5.534 Billion in trailing twelve month free cash flow, or a FCF/EV Yield of 11%. The company has made smart capital allocation decisions with regards its free cash flow, spending $3.447 Billion (ttm) buying back shares and providing shareholders with a shareholder yield of 9%, while reducing the company’s debt by $541 Million (ttm).

What seems to get overlooked is that Express’ current revenues of $100.276 Billion (ttm) are inline with the FY2016 revenues of $100.288 Billion and only fractionally lower than the record revenues of $104.099 Billion set in FY2013. Additionally, Express’ current net profit of $3.506 Billion (ttm), free cash flow of $5.533 Billion (ttm), and EPS of $5.71 (ttm) are all at historical highs.

Lastly, its also worth considering Express’ annualized Return on Equity (ROE) for the quarter ending June 2017. A quick calculation shows that the company had $15.923 Billion in equity for the quarter ending March 2017 and $15.745 Billion for the quarter ending June 2017. If we divide that number by two we get $15.834 Billion. If we consider that the company has $3.506 Billion (ttm) in net income, that equates to an annualized Return on Equity (ROE) for the quarter ending June 2017 of 22%.

With all of the above in mind it is difficult to understand Express’ current P/E of 10.9 compared to its 5Y average of 27.9**. This is a company that traded on a P/E close to 40 back in July of 2013. Express has a FCF/EV Yield of 11% and an Acquirer’s Multiple of 9.15, or 9.15 times operating earnings. The company has an annualized Return on Equity (ROE) for the quarter ending June 2017 of 22% and a shareholder yield of 9%. All of which indicates that Express is undervalued.

** Morningstar

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