Dodge & Cox (Trades, Portfolio) was founded in 1930, by Van Duyn Dodge and E. Morris Cox. As of March 2006, Dodge & Cox managed over $104 billion in separate accounts and mutual funds.
In terms of investment philosophy, Dodge & Cox team is guided both in what they buy and what they sell by an ongoing search for superior relative value, steering clear of popular choices that come at a price they would rather not pay. Investing when valuations are low creates greater potential for capital appreciation. They look to be long-term owners of companies whose current valuations don’t reflect their long-term earnings and cash-flow prospects.
Last quarter, Dodge and Cox added to their Express Scripts (ESRX, Financial) position by buying 4,972,525 shares. As of March 31, the fund held 24,221,504 shares of the company. The following chart shows the firm’s holding history in ESRX.
Express Scripts is the largest PBM (pharmacy benefit management) company in the United States, offering a full range of services to its clients, which include managed care organizations, health insurers, third-party administrators, employers, union-sponsored benefit plans, workers’ compensation plans and government health programs. Pharmacy benefit management companies work to develop innovative strategies designed to keep medications affordable. Express Scripts work with clients, manufacturers, pharmacists and physicians to increase efficiency in the drug distribution chain, to manage costs in the pharmacy benefit chain and improve members’ health outcomes and satisfaction.
The company's EPS forecast for the current fiscal year is $5.44 and next year is $6.03. According to the consensus estimates, its top line is expected to increase 4% current year and grow 2.40% next year. It is trading at a forward P/E of 14.50. Out of 26 analysts covering the company, 15 are positive and have buy recommendations, and 11 have hold ratings.
The work of PBM companies is becoming increasingly critical these days. Customers are facing unprecedented cost increase driven by double-digit brand inflation, the continued 15% to 18% inflation of specialty drugs and overwhelming regulatory burden. They are now taking a more proactive approach in managing their healthcare decisions. These trends represent growth opportunities for Express Scripts and allow it to use its scale, alignment and innovation to create solutions such as home delivery programs, narrow networks, restricted formularies and specialized care.
Express Scripts' team of experts is combining three capabilities to drive better decisions and healthier outcomes. These are actionable data, behavioral sciences and clinical specialization. These capabilities serve as a foundation for the company's Health Decision Science which enables it to foster better collaboration, accelerate innovation and create innovative suite of solutions.
The company recently signed an agreement with AbbVie Inc. (ABBV) to provide its Viekira Pak hepatitis C drug in exchange of discounted pricing. This agreement verifies Express Scripts strategy of controlling cost of new megadrugs. Express Scripts is trading at 16.07 times its FY2015 EPS. Analysts are expecting the company's adjusted EPS to grow 11.27% in FY2015 and 10.68% in FY2016. Given the company's long-term growth potential and reasonable valuations, I believe it is a good buy.
