Express Scripts Holding Company (NASDAQ:ESRX) shares are up more than 7.73% this year and recently decreased -0.57% or -$0.46 to settle at $80.41. Humana Inc. (NYSE:HUM), on the other hand, is up 8.91% year to date as of 01/16/2018. It currently trades at $270.17 and has returned 4.49% during the past week.
Express Scripts Holding Company (NASDAQ:ESRX) and Humana Inc. (NYSE:HUM) are the two most active stocks in the Health Care Plans industry based on today’s trading volumes. We will compare the two companies based on the strength of various metrics, including growth, profitability, risk, return, and valuation to determine if one is a better investment than the other.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect ESRX to grow earnings at a 11.64% annual rate over the next 5 years. Comparatively, HUM is expected to grow at a 11.87% annual rate. All else equal, HUM’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. , compared to an EBITDA margin of 6.98% for Humana Inc. (HUM). ESRX’s ROI is 12.90% while HUM has a ROI of 5.40%. The interpretation is that ESRX’s business generates a higher return on investment than HUM’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, HUM’s free cash flow per share was +18.31. On a percent-of-sales basis, ESRX’s free cash flow was 1.8% while HUM converted 4.81% of its revenues into cash flow. This means that, for a given level of sales, HUM 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 0.45 for HUM. ESRX is therefore the more solvent of the two companies, and has lower financial risk.
ESRX trades at a forward P/E of 10.10, a P/B of 2.89, and a P/S of 0.46, compared to a forward P/E of 22.05, a P/B of 3.48, and a P/S of 0.73 for HUM. ESRX is the cheaper of the two stocks on an earnings, book value and sales basis. 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
Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. ESRX is currently priced at a 8.84% to its one-year price target of 73.88. Comparatively, HUM is 0.22% relative to its price target of 269.59. This suggests that HUM 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 2.60 for ESRX and 2.10 for HUM, which implies that analysts are more bullish on the outlook for ESRX.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. ESRX has a beta of 0.92 and HUM’s beta is 0.84. HUM’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. ESRX has a short ratio of 7.00 compared to a short interest of 2.83 for HUM. This implies that the market is currently less bearish on the outlook for HUM.
Humana Inc. (NYSE:HUM) beats Express Scripts Holding Company (NASDAQ:ESRX) on a total of 9 of the 14 factors compared between the two stocks. HUM 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. In terms of valuation, ESRX is the cheaper of the two stocks on an earnings, book value and sales basis, HUM is more undervalued relative to its price target. Finally, HUM has better sentiment signals based on short interest.