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Right Where it Should Be

Stock (Symbol) Stock Price

Catalyst Health Solutions (CHSI)

$37

Data is as of Expected to Report Sector

September 22, 2010

Nov 1

Healthcare

Company Description
Catalyst Health Solutions, Inc. is a full-service pharmacy benefit management (PBM) company. The Company operates under the brand name Catalyst Rx. The Company provides its clients access to a contracted, non-exclusive national network of approximately 63,000 pharmacies. It also provide its clients members with timely and adjudication, while controlling pharmacy spending trends through customized plan designs, clinical programs, physician orientation programs and member education. PBM clients include self-insured employers, including state and local governments, managed care organizations, unions, third-party administrators (TPAs), hospices and individuals who contract with the Company to administer the prescription drug component of their overall health benefit programs. In September 2010, the Company acquired Independence Blue Cross’s pharmacy benefit management subsidiaries, FutureScripts, LLC and FutureScripts Secure, LLC.
Sharek’s Take
David SharekCatalyst Health Solutions (CHSI) took a tumble last month after it disclosed the company could lose Wellmark as a customer. On the other end of the spectrum, CHSI closed its purchase of the pharmacy benefit manager (PBM) FutureScripts. What does this all mean? Details. All businesses have details regarding the current factors affection operations. Companies gain customers, lose customers, expand via acquiring smaller companies, etc. I’ve owned CHSI stock since May 4, 2004.The company has proven to be a 20% grower to me. A key aspect to the business model is acquisitions. CHSI buys other PBMs to grow. One thing the company hasn’t done is come through exactly as analysts expected. Maybe annual estimates go up or down, maybe the company beats or misses by a little. But if we take a step back, we see Catalyst Health Solutions has done very well. In the end its a 20% grower that’s selling for 21 times earnings — the stock is right where it should be.
One-Year Chart
Here’s the one-year chart showing the drop from $44 to $35. Now at $37, Since this is a 20% grower, we could peg fair value at 20 times earnings. OK we could give CHSI a higher P/E of 24 — rewarding the stock for solid performance done consistently throughout the years. I’m taking the middle — CHSI is worth 22 times earnings right now. CHSI is in a trading range between $34 and $44 which means a P/E of 19 to 24.  CHSI one-year chart
Profit Growth Earnings Table
Profits grew 19% last quarter, revenues rose 24%. I like that sales grew faster than 20%, it should make profit growth of at least 20% achievable. CHSI Earnings Table
Beat the Street
CHSI has met analyst estimates for three straight quarters. In the past CHSI has missed, mainly because it looks long-term and doesn’t mind giving up a penny today for a revenue stream of a penny a year (sometimes you have to give up a little up front to close a deal in the PBM industry).
Annual Profit Estimates
2010 estimates declined a bit, maybe because of the Wellmark business. 2011 and 2012 estimates increased a bit, maybe because of the FutureScripts profits that are expected to come.
Future Quarters
Estimates for the next two quarters declined slightly — but the big news here is quarterly profit growth looks very solid for the next four quarters. These are estimates looks solid.
Fair Value
CHSI is worth somewhere between 20 and 24 times earnings. I’m a long-term thinker with this stock. The stock is nowselling right where it should be. Upside is good if you hold the stock a year (or more).
Year Profits x P/E = Price Upside/Downside
Today 1.80 x 21 = 37  
2010 Fair Value 1.80 x 22 = 40 8%
2011 Fair Value 2.27 x 22 = 50 35%
Ten-Year Chart
Although the ten-year chart of CHSI is choppy, the Annual EPS Growth has been good every year. This stock flies under the radar of many investors. Its a smaller PBM than Express Scripts (ESRX) and Medco (MHS). Do notice CHSI has compounded at a rate of 23% a year. CHSI ten-year chart
Power Ranking Bottom Line
Growth Portfolio

11 of 17

Catalyst health Solutions is ranked 11 of the 17 stocks in the Growth Portfolio Power Rankings. at $37 the stock is selling around where it should be. I’m not looking to buy more, or sell some, of this stock. Long-term investors can invest here if they wish, as there is respectable upside if you hold the stock for a year or more.
Aggressive Growth Portfolio

N/A

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