Express Scripts Outlook Improves Amid Tax Reform, CVS-Aetna Deal

Recent developments in the healthcare space, including the proposed merger between CVS Health Corp (NYSE: CVS) and Aetna Inc (NYSE: AET), bodes well for Express Scripts Holding Company (NASDAQ: ESRX).

The Analyst

Bernstein's Lance Wilkes upgraded Express Scripts from Underperform to Market Perform with a price target boosted from $51 to $65.

The Thesis

The most compelling factor supporting an upgrade of Express Scripts' stock is tax reform, Wilkes said in a Wednesday note. Tax reform and the potential for a reduction in corporate tax rate would boost Express Scripts' after-tax earnings by around 11 percent over time, but with a near-term higher saving of about 23 percent, the analyst said. 

Second, the CVS/Aetna merger would benefit Express Scripts as health plan clients will look to "move away from a perceived competitor," the analyst said. This would impact medium-sized health plans for the most part — a segment in which Express Scripts is smaller than CVS, Wilkes said. While this segment is lower margin than the company's employment segment, it would nevertheless be additive to earnings at the expense of margins, the analyst said.

Finally, Amazon.com, Inc. (NASDAQ: AMZN)'s potential entry into the pharmaceutical space would likely prompt a large player like Walgreens Boots Alliance Inc (NASDAQ: WBA) to acquire Express Scripts in a defensive move, Wilkes said. Although there is a low probability of this occurring, it nevertheless serves as an upside opportunity for the stock, the analyst said. 

Price Action

Shares of Express Scripts gained more than 0.5 percent early Wednesday morning.

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Photo courtesy of Express Scripts.