Monday, December 22, 2008

Establish Express Scripts Inc Covered Calls


A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Express Scripts Inc (ESRX).

Express Scripts provides a range of Pharmacy Benefits Management(PBM) services in North America. The primary emphasis is mail order prescription fulfillment. The purchase of this company demonstrates a belief in the growth in the demographic and social trends that are important drivers in Express Scripts business; that is an aging population with increasing prescription needs; increasing percent of generic drug penetration (which is also the most profitable category for ESRX); and the commitment of the Obama administration and Congress to pursue health-care cost efficiency opportunities. In this regard, an increased emphasis on e-prescribing, mail order generics, and extending medical prescription benefits to more citizens are all trends that will directly benefit Pharmacy Benefits Managements(PBMs) in general and including Express Scripts in particular. The current P/E ratio is somewhat high at 20.5 but earnings are expected to grow by 20% next year. Other key financial metrics (such as the 0.8 Price/Sales Ratio and Total Debt of only 12.4% of their $14.8 Billion Market Cap) are at attractive levels. The excellence of their operational execution is demonstrated by the fact that cash flow is growing at a faster rate than net income. Overall, the success of their business model is evident in their having achieved an exceptional 85.4% return-on-equity.

Established Express Scripts Inc (ESRX) Covered Calls for Jan09:
12/22/08 Bought 200 ESRX @ $59.86
12/22/08 Sold 2 ESRX Jan09 $60.00 Calls @ $2.90

Annualized Return If Unchanged (ARIU): +68.0%
Annualized Return If Exercised (ARIE): +71.3%
Downside Breakeven Protection: 4.8%

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