RBC Likes Express Scripts After 'Sharp' Pullback

Health care stocks ended Tuesday's session mostly lower after three of America's most notable CEOs announced a collaboration to explore ways of improving employee health care services and slashing costs. At the same time, this created a unique buying opportunity for Express Scripts Holding Company ESRX, according to analysts at RBC.

The Analyst

RBC Capital Markets' George Hill upgraded Express Scripts' stock from Sector Perform to Outperform with a price target boosted from $68 to $98.

The Thesis

Amazon.com, Inc. AMZN's entry into the health care space has been a topic of conversation since the back half of 2017, Hill said in a note. After Tuesday's sell-off in health care stocks, Amazon's move to enter the space is "more than reflected" in Express Scripts' stock and the likelihood of Amazon disrupting the drug supply chain space is "overstated."

Although the sentiment surrounding Express Scripts remains more negative than positive, from an operating perspective, the company boasts more tailwinds than headwinds, the analyst said. Specifically, the company is poised to take PBM (pharmacy benefit manager) share following the CVS Health Corp CVS tie-up with Aetna Inc AET, see continued growth in specialty/rebates/biosimilars, and benefit from tax reform.

Express Scripts' stock is among one of the "few cheap stocks" in the entire market as defined as trading with a P/E multiple of less than 11.5 times on 2020 estimates ($6.99 per share), Hill said. A more appropriate valuation on 2020 estimates would be around 15 times, which yields a target of about $105 per share, which when discounted back one year derives the analyst's $98 price target.

Price Action

Shares of Express Scripts were trading lower by around 0.5 percent Wednesday at $78.91.

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