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Predicted Gross Margin Pressure, EPS Erosion Turn Bernstein Bearish On Express Scripts

Predicted Gross Margin Pressure, EPS Erosion Turn Bernstein Bearish On Express Scripts
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Shares of Express Scripts Holding Company (NASDAQ: ESRX) have risen more than 30 percent since Thanksgiving 2017, mostly due to expectations of earnings improvements stemming from U.S. tax legislation. But the gains are now "overdone," according to Bernstein. 

The Analyst

Bernstein's Lance Wilkes downgraded Express Scripts' stock rating from Market-Perform to Underperform with an unchanged $69 price target.

The Thesis

Express Scripts' recent momentum can be attributed to expectations for improved earnings due to tax changes, Wilkes said in the downgrade note. While the company could see a near-term earnings per share benefit of 21 percent due to changes in the tax structure, the EPS benefit will "erode" to just 10 percent by 2021, he said. 

The overall pharmacy benefit manager space is seeing peak gross margins, Wilkes said. PBM gross margins are roughly split evenly from rebate retention; retail spread; and traditional mail order and specialty home delivery, he said. The retail spread and rebates are at risk looking forward, and client pricing pressure could reduce gross margins over a five-year period from 7.8 percent to 7.4 percent, the analyst said. 

The policy environment has turned negative for PBMs and other companies within the drug supply chain, Wilkes said. The potential entry of, Inc. (NASDAQ: AMZN) is a particularly negative event for Express Scripts due to the increase in competition, which could prompt the company to change its business model at the expense of gross margin, he said. 

Price Action

Shares of Express Scripts were trading lower by 1.39 percent Thursday afternoon.

Related Links:

RBC Likes Express Scripts After 'Sharp' Pullback

Express Scripts Outlook Improves Amid Tax Reform, CVS-Aetna Deal

Photo courtesy of Express Scripts. 

Latest Ratings for ESRX

Mar 2018BernsteinUpgradesUnderperformMarket Perform
Mar 2018Maxim GroupDowngradesBuyHold
Mar 2018JefferiesDowngradesBuyHold

View More Analyst Ratings for ESRX
View the Latest Analyst Ratings

Posted-In: Bernstein Lance WilkesAnalyst Color Downgrades Health Care Price Target Analyst Ratings General Best of Benzinga


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