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Express Scripts Multiples Valuation

Express Scripts Multiples Valuation. Ian Johnston. Multiples Review. Benefits Quick and easy to compile Does not require forecasts of future performance Shortcomings Requires truly comparable firms to compute multiples (VERY difficult in practice)

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Express Scripts Multiples Valuation

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  1. Express Scripts Multiples Valuation Ian Johnston

  2. Multiples Review • Benefits • Quick and easy to compile • Does not require forecasts of future performance • Shortcomings • Requires truly comparable firms to compute multiples (VERY difficult in practice) • Assumes comparable firms are correctly valued • Arbitrary weighting of comparable firms’ multiples can lead to wildly different stock recommendations

  3. Issues for Drug Stores • 2 “sub-industries” with very different business models • PBMs • Express Scripts, Caremark (part of CVS) • Pharmacies • CVS, Walgreens, Walmart • No direct comparable for ESRX • Difficult to break out Walmart Pharmacy enterprise value, equity associated with pharmacy, etc

  4. Issues Continued • Different year ends • ESRX and CVS end Dec. 31 • WMT ends Jan. 31 • WAG ends Aug. 31 • These issues combine to undermine confidence in valuing ESRX using these comparables

  5. Multiples Used • 3 methods used • EPAT Multiple • NI Multiple • Industry Specific • Instead of “R&D” for P&G, used “Drug Sales” • The 3 methods produced VASTLY different results

  6. EPAT Multiple Price at close Thursday: $74.43

  7. NI Multiple Price at close Thursday: $74.43

  8. Industry Multiple Computation Find book value of equity, equity value, and drug sales for each firm Compute multiples using (P-BV)/DS Average multiples of WAG, CVS, WMT Apply to ESRX to find equity value and equity value per share

  9. Industry Multiple Price at close Thursday: $74.43

  10. Summary • EPAT Multiple • Equity value = $23.48, Price = $74.43 • SELL • NI Multiple • Equity value = $31.23, Price = $74.43 • SELL • Industry Multiple • Equity value = $190.42, Price = $74.43 • BUY

  11. No confidence in Multiples Range from $23.48 to $190.42 All equity value estimates wildly different than stock price on Thursday Lack of comparability of firms drove bad estimates for ESRX No credence should be placed in valuing ESRX using CVS, WAG, and WMT as comparables Buy/Hold/Sell Recommendation = ?????

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