Benefit from pharmacy benefits management
It's easy to make an argument for owning Express Scripts (NASDAQ:ESRX) stock. Americans are aging. Older people tend to use more prescription drugs. Payers, including insurance companies, government agencies, and self-funded employers, want to keep prescription drug costs down. Express Scripts helps achieve that goal.
Express Scripts also claims some competitive advantages that few other pharmacy benefits managers (PBMs) share. Its size provides significant leverage in negotiating prices with drug distributors as well as giving operational efficiencies. Because of its large number of customers and high prescription volume, Express Scripts has access to vast amounts of data that it uses to pinpoint ways to cut waste related to prescription drug usage.
With all these things going for it, you might expect Express Scripts' shares to be priced in the stratosphere. That's not the case, however. The stock trades at just over 10 times forward earnings. Wall Street expects the PBM's earnings growth over the next five years to be roughly the same as the last five years -- a period where Express Scripts' shares gained over 60%.
What's the catch? Express Scripts and one of its largest customers, giant health insurer Anthem (NYSE:ANTM), have sued each other. Anthem claims that Express Scripts owes up to $3 billion in past drug savings. Express Scripts disagrees.
My view is that the market has baked an Anthem departure into Express Scripts' share price. However, it's not a foregone conclusion that Anthem will take its business elsewhere -- at least not until its contract with the PBM expires in 2019. Even if the two companies do part ways, Express Scripts is still priced inexpensively considering its growth prospects.
A patient way to rack up investing returns
HCA Holdings (NYSE:HCA) directly or indirectly operates 169 hospitals and 116 freestanding surgery centers in 20 states and the United Kingdom. That large footprint makes the company the biggest health system in the U.S.
Investors have plenty to like about HCA. The company's scale should allow it to effectively navigate the changing healthcare landscape. HCA's stock benefited tremendously from implementation of Obamacare, more than quadrupling in the last five years. But HCA doesn't necessarily need Obamacare to survive and thrive in the coming years.
Like many companies in the healthcare industry, HCA stands to benefit from the aging demographics in the U.S. (and the U.K.). Older individuals are more likely to require hospitalization. As the population ages, government healthcare programs will definitely try to hold hospital costs down. I suspect that larger hospital systems like HCA will have a leg up over many of their smaller rivals in keeping a lid on those costs. Bigger is often better when it comes to negotiating with vendors and other healthcare providers and for recruiting quality staff.
HCA's significant presence in the freestanding surgery center market is a big positive for the company. Payers often prefer these outpatient surgical centers because they tend to be less costly than inpatient surgeries. Outpatient revenue accounted for nearly 40% of HCA's total patient revenue in the second quarter. This percentage could grow in the years to come. Milton Johnson, HCA's chairman and CEO, indicated in the second-quarter earnings call that the health system continues to be in acquisition mode on this front.
HCA's stock currently trades at less than 11 times forward earnings and only 13 times trailing-12-month earnings. While the company might not see the heady earnings growth experienced over the past five years thanks largely to Obamacare, double-digit percentage growth on an annual basis seems quite attainable.
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