Express Scripts Holding Company (NASDAQ:ESRX) shares are down more than -1.38% this year and recently increased 0.65% or $0.44 to settle at $68.28. Anthem, Inc. (NYSE:ANTM), on the other hand, is up 55.45% year to date as of 12/05/2017. It currently trades at $222.91 and has returned 0.54% during the past week.
Express Scripts Holding Company (NASDAQ:ESRX) and Anthem, Inc. (NYSE:ANTM) are the two most active stocks in the Health Care Plans industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect ESRX to grow earnings at a 11.79% annual rate over the next 5 years. Comparatively, ANTM is expected to grow at a 12.38% annual rate. All else equal, ANTM’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 6.92% for Anthem, Inc. (ANTM). ESRX’s ROI is 12.90% while ANTM has a ROI of 7.80%. The interpretation is that ESRX’s business generates a higher return on investment than ANTM’s.
The amount of free cash flow available to investors is ultimately what determines the value of a stock. ESRX’s free cash flow (“FCF”) per share for the trailing twelve months was +3.18. Comparatively, ANTM’s free cash flow per share was +7.51. On a percent-of-sales basis, ESRX’s free cash flow was 1.8% while ANTM converted 2.27% of its revenues into cash flow. This means that, for a given level of sales, ANTM is able to generate more free cash flow for investors.
Liquidity and Financial Risk
ESRX’s debt-to-equity ratio is 0.94 versus a D/E of 0.63 for ANTM. ESRX is therefore the more solvent of the two companies, and has lower financial risk.
ESRX trades at a forward P/E of 8.88, a P/B of 2.44, and a P/S of 0.39, compared to a forward P/E of 17.31, a P/B of 2.24, and a P/S of 0.65 for ANTM. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. ESRX is currently priced at a 0.95% to its one-year price target of 67.64. Comparatively, ANTM is -3.33% relative to its price target of 230.59. This suggests that ANTM is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.90 for ESRX and 2.10 for ANTM, which implies that analysts are more bullish on the outlook for ESRX.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. ESRX has a beta of 0.85 and ANTM’s beta is 0.77. ANTM’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. ESRX has a short ratio of 7.72 compared to a short interest of 3.70 for ANTM. This implies that the market is currently less bearish on the outlook for ANTM.
Anthem, Inc. (NYSE:ANTM) beats Express Scripts Holding Company (NASDAQ:ESRX) on a total of 10 of the 14 factors compared between the two stocks. ANTM generates a higher return on investment, is more profitable, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. ANTM is more undervalued relative to its price target. Finally, ANTM has better sentiment signals based on short interest.