Express Scripts Holding Company (NASDAQ:ESRX) shares are up more than 7.30% this year and recently decreased -0.32% or -$0.26 to settle at $80.09. Molina Healthcare, Inc. (NYSE:MOH), on the other hand, is up 10.08% year to date as of 01/10/2018. It currently trades at $84.41 and has returned 8.72% during the past week.
Express Scripts Holding Company (NASDAQ:ESRX) and Molina Healthcare, Inc. (NYSE:MOH) are the two most active stocks in the Health Care Plans industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect ESRX to grow earnings at a 11.64% annual rate over the next 5 years. Comparatively, MOH is expected to grow at a 59.90% annual rate. All else equal, MOH’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. Express Scripts Holding Company (ESRX) has an EBITDA margin of 6.75%. This suggests that ESRX underlying business is more profitable ESRX’s ROI is 12.90% while MOH has a ROI of 4.60%. The interpretation is that ESRX’s business generates a higher return on investment than MOH’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, MOH’s free cash flow per share was +4.56. On a percent-of-sales basis, ESRX’s free cash flow was 1.8% while MOH converted 1.46% of its revenues into cash flow. This means that, for a given level of sales, ESRX is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. ESRX has a current ratio of 0.70 compared to 1.30 for MOH. This means that MOH can more easily cover its most immediate liabilities over the next twelve months. ESRX’s debt-to-equity ratio is 0.94 versus a D/E of 1.61 for MOH. MOH is therefore the more solvent of the two companies, and has lower financial risk.
ESRX trades at a forward P/E of 10.06, a P/B of 2.88, and a P/S of 0.46, compared to a forward P/E of 27.25, a P/B of 3.37, and a P/S of 0.24 for MOH. 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 8.41% to its one-year price target of 73.88. Comparatively, MOH is 9.52% relative to its price target of 77.07. This suggests that ESRX 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 2.70 for MOH, which implies that analysts are more bullish on the outlook for MOH.
Risk and Volatility
To gauge the market risk of a particular stock, investors use beta. Stocks with a beta above 1 are more volatile than the market as a whole. Conversely, a beta below 1 implies below average systematic risk. ESRX has a beta of 0.92 and MOH’s beta is 0.95. ESRX’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.ESRX has a short ratio of 6.99 compared to a short interest of 6.02 for MOH. This implies that the market is currently less bearish on the outlook for MOH.
Express Scripts Holding Company (NASDAQ:ESRX) beats Molina Healthcare, Inc. (NYSE:MOH) on a total of 9 of the 14 factors compared between the two stocks. ESRX is more profitable, generates a higher return on investment, 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 and book value, ESRX is more undervalued relative to its price target. Finally, AET has better sentiment signals based on short interest.