Pharmacy benefit manager (PBM) Express Scripts Holding Company is scheduled to report second-quarter 2016 results on Jul 25.

Express Scripts has beaten earnings expectations in three of the four trailing quarters but missed the same last quarter, with an average positive earnings surprise of 0.67%.

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

Factors at Play

For the second quarter, Express Scripts expects earnings per share in the range of $1.55–$1.59 while adjusted claims are anticipated to be 312 million to 322 million. The company expects revenues related to a large client contract to be realized in the quarter due to the structure of the contract. It also projects lower fill costs and call volumes on the back of digital and productivity initiatives during the second half of the year.

We expect Express Scripts to continue benefitting 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.

However, investor focus will remain on the status of Express Scripts' contract with Anthem, Inc. (running through 2019). Note that Anthem filed a lawsuit against Express Scripts in order to recover damages for pharmacy pricing, which was higher than the competitive benchmark pricing. Anthem is also seeking to recover damages related to operational issues and a declaration of its right to terminate the contract with Express Scripts. The companies had signed the agreement in 2009, which allowed a periodic pricing review from time to time through its tenure (expires in 2019). Anthem alleged that it has been trying to negotiate the terms of the contract with Express Scripts, but had failed to do so, seeing that the latter was not keen enough. As per Anthem, it is receiving competitive benchmark pricing and is entitled to more favorable terms. Express Scripts believes that the contract might not be renewed at all or renewed at less favorable terms, given the recent litigation.

Earnings Whispers

Our proven model does not conclusively show that Express Scripts is likely to beat 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 0.00%, as both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at $1.57.

Zacks Rank: Express Scripts currently carries a Zacks Rank #3. Though this increases the predictive power of ESP, the company’s 0.00% ESP makes 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.

Stocks That Warrant a Look

Here are a couple of health care stocks that you may want to consider, as our model shows that they have the right combination of elements to post an earnings beat this quarter.

Gilead Sciences (GILD Quick QuoteGILD - Free Report) has an Earnings ESP of +6.91% and a Zacks Rank #2. The company is scheduled to report second -quarter results on Jul 25.

The Earnings ESP for Nektar Therapeutics (NKTR Quick QuoteNKTR - Free Report) is +50.00% and it sports a Zacks Rank #1. The company is expected to release results on Aug 3.

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