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Stock Strategist

Express Scripts Well Positioned for New Health-Care Order

The wide-moat pharmacy benefit manager is still undervalued.

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With its wide Morningstar Economic Moat Rating, solid growth potential, and dominant market position,  Express Scripts (ESRX) is significantly undervalued, in our opinion. We strongly believe the firm's command of the pharmaceutical supply chain is unparalleled, given its 30% market share. The pharmacy benefit manager's recent exclusion of certain branded drugs from its national formulary and its Medicare Part D partnership with Walgreen highlight its advantages. Given these factors, we believe Express Scripts will produce robust economic profits over the long term.

Express Scripts reported third-quarter results that were largely in line with our expectations, and we are reiterating our $89 fair value estimate. The firm also narrowed its 2014 adjusted full-year earnings per share outlook to $4.86-$4.90 from $4.84-$4.92 (maintaining a midpoint estimate of $4.88). The shares remain materially undervalued and continue to be one of the better opportunities in the market, in our view. We believe the cost-containment services Express provides its clients will grow more critical as payers look for ways to materially curb the cost of pharmaceuticals. From our perspective, this dynamic will be a major driver of long-term outsize returns on capital for the pharmacy benefit manager.

Vishnu Lekraj does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.