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What Awaits Express Scripts (ESRX) this Earnings Season?

Pharmacy benefit manager (PBM) Express Scripts Holding Company ESRX is scheduled to report fourth-quarter 2015 results on Feb 16.

Express Scripts has beaten earnings expectations in three of the four trailing quarters, and reported in-line results in the other. In the last reported quarter, Express Scripts recorded a positive earnings surprise of 0.69%. Overall, the company has posted an average positive earnings surprise of 0.89% over the past four quarters.

Let’s see how things are shaping up for this quarter.

Factors at Play

Express Scripts expects fourth-quarter 2015 earnings in the range of $1.54–$1.58 per share, reflecting year-over-year growth of 11–14%. The company anticipates total adjusted claims in the range of 333–353 million.

In Dec 2015, the company reaffirmed its guidance for the full year. Express Scripts continues to expect earnings per share in the range of $5.51–$5.55, up 13–14% year over year. The company projects total adjusted claims in the range of 1,290 million to 1,310 million. The Coventry Medicare business was supposed to roll off by 2015 end as a result of an acquisition.

We believe Express Scripts should continue benefit from increased generic utilization, shift toward mail orders, strong specialty growth and an aging population. Branded drugs are becoming increasingly expensive due to double-digit brand inflation, continued rise in the price of specialty drugs and overwhelming regulatory burden pushing demand for generics. Hence, clients need innovative solutions to counter this trend. The company is focusing on specialty drugs, which are expected to account for 50% of the total drug spend by 2018.

Express Scripts recently entered into a partnership with Imprimis Pharmaceuticals IMMY to provide a low-cost formulation of Daraprim.

Meanwhile, investor focus will remain on the status of Express Scripts' contract with Anthem, Inc. ANTM (running through 2019), given the latter’s upcoming acquisition of Cigna. Express Scripts recently stated that its 10-year agreement with its largest client, Anthem, is still under review. The companies had signed the agreement in 2009, which allows a periodic pricing review from time to time during the tenure.

Earnings Whispers

Our proven model does not conclusively show that Express Scripts is likely to beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) to be able to beat estimates. This is not the case here, as you will see below.

Zacks ESP: The Earnings ESP for Express Scripts is -1.29%, as the Most Accurate estimate stands at $1.53, while the Zacks Consensus Estimate is pegged at $1.55.

Zacks Rank: Express Scripts currently carries a Zacks Rank #3. Though this increases the predictive power of ESP, the company’s negative ESP makes a surprise prediction difficult.

Note that we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

A Stock That Warrants a Look

Here is a health care stock that you may want to consider, as our model shows that it has the right combination of elements to post an earnings beat this quarter.

The Earnings ESP for Allergan AGN is +7.46% and it carries a Zacks Rank #3. The company is scheduled to release fourth-quarter 2015 results on Feb 22.

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