Shares of Express Scripts (ESRX) and Netflix (NFLX) opened down today after reporting earnings last night.
ESRX reported earnings of $0.66, three cents shy of the $0.69 First Call estimate. Last quarter’s earnings were also lowered by four cents recently, so the company really was seven cents short.
Express Scripts purchased NextRx from Wellpoint (WLP) last year. NextRx has been great for profits and sales, and will help profits longer term because many NextRx clients use brand name drugs instead of generics, which are more profitable for ESRX. Generic choices will pick up the next few quarters as more generics are coming to market.
Express Scripts pays for new deals, giving kick-backs as a negotiation tactic to get deals done. Although my wording for this is strong, the practice is ethical in the pharmace benefit manager (PBM) industry. Basically, if you want to get a good client, who will deliver sales and profits for the next three years, PBMs have to pay a fee upfront to the new client (say $1million) and also expand internally to get ready for the new customers.
NFLX Guides Lower
Netflix beat the street, but guidance was light due to higher costs for acquiring movies. The big deal with Netflix is there’s now a way to rationalize what the company will make this year and next. In past quarters, you had to guide estimates higher so much that you couldn’t get a handle on what the company would make. $2? $3? $5?
Now that NFLX lowered next quarter’s estimate from First Call’s $1.19 to $0.93-$1.15 a share, you can get your hands around what NFLX will earn — this allows analysts and portfolio managers to guesstimate a P/E. During 2009, 2010 and part of 2011 you couldn’t grasp a P/E because you had no idea what NFLX would ultimately make.
For example, say a company earned $0.25 last year. This year it was expected to earn $0.50, but the company kept beating the street and upping estimates as the stock shot from $10 to $100. Your could rationalize the $100 stock because if profits this year came in at say $2 then the stock could be worth $100 (50 times earnings). Also the company could earn $4 next year and thus the stock in this example would have a P/E of only 25.
Bottom Line
The bottom line is these are both good stocks. NFLX might not soar as it had been, ESRX wasn’t timely before this news came out anyway.
Disclosure: Clients and family of DavidSharek.com owned shares of ESRX at the time of publication.See also:
