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Back to Neutral on Express Scripts

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We have downgraded Express Scripts Holding Company (ESRX - Free Report) to Neutral from Outperform after the company hinted at a lackluster 2013 performance. The stock carries a Zacks #3 Rank (Hold rating) in the short run.

The company projected a bleak economic outlook for 2013 on its third quarter 2012 conference call. Express Scripts stated that a higher unemployment rate is expected to lead to lower demand for health coverage in the upcoming year. Express Scripts also hinted that the 2013 earnings estimates provided by analysts were higher than the company’s expectations. We have reduced our 2013 earnings estimate by 20 cents to $4.25 per share.

Express Scripts’ third quarter 2012 adjusted earnings increased 29.1% to $1.02 per share, beating the Zacks Consensus Estimate of 99 cents per share. Revenues jumped 133.3% in the reported quarter to $27.0 billion. The massive jump in revenues was attributable to the expanded product portfolio at Express Scripts due to the acquisition of Medco Health Solutions.

Apart from releasing its third quarter results 2012, Express Scripts upped the lower end of its adjusted earnings guidance for 2012. The company now expects adjusted earnings for 2012 in the range of $3.65-$3.75 per share (previous guidance: $3.60 – $3.75 per share). We, too, have increased our 2012 earnings estimate by 2 cents to $3.72.

In April 2012, Express Scripts acquired health care company Medco Health Solutions for $29.1 billion. The acquisition, which should lower the cost of prescription drugs and improve the quality of healthcare, is expected to generate synergies worth $1 billion. The company expects to realize the synergies sooner than previously targeted. Express Scripts’ revenues received a major boost with the acquisition of Medco Health.

We are also pleased with the favorable resolution of Express Scripts’ long-standing dispute with retail giant Walgreen .

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