A Financial Analysis of MedcoHealth Solutions Incorporated

Like many other industries, drug store companies have been doing quite well for the past six months. With stores like Walgreens, CVS, and Rite Aid all near their respective 52 week highs, there may be some reluctance on the part of investors to commit new capital to these service-sector stocks. Nevertheless, I am firm believer that there is always money and profit to be made, regardless the industry, and I foresee, relative to the drug store business, the company MedcoHealth Solutions (MHS) having the fundamentals and economic support to put capital gains in the banks of shareholders.

As stated on the profile from Yahoo! Finance, MedcoHealth engages in a variety of different services. While only located primarily in the United States, as the baby-boomer generation continues to grow older and becomes more dependent on medical products, there is ample opportunity, especially during times of coming economic slowdown, for profits to remain high relative to the rest of the market. As most of the products and services offered by MedcoHealth are fairly inelastic, as the economy worsens, earnings should not fall in dramatic fashion as the services provided by this company are almost always required, regardless the amount of discretionary income.

When such is the case, earnings do not fall, multiples remain low, and many institutional investors will become overweight on the industries MedcoHealth falls under and send a ripple effect of continued optimism from both the institutional and retail side. In addition after looking at the services provided by MedcoHealth in relation to "plan design, clinical management, pharmacy management, health management, physician services, and Web-based services," because there will never be a decline in the foreseeable future of clients in need of medical services, MedcoHealth will continue to see further share price growth as already indicated with nearly a 150% growth rate over the past four years.

After examining the previous paragraph, many may wonder that other companies in this industry also support such economical sensitive fluctuation patters, and what would make MedcoHealth a better purchase relative to these more well-known companies such as Walgreen or CVS. Looking at MedcoHealth from a historical view, there is strong evidence to support how this company has grown over the past few years. With revenue growth at 7% and 4% over the past two respective fiscal years in chronological order coupled with earnings growth of net income slotted at 25% and 13% during the same time period, MedcoHealth seems to be continuing its strong fundamental growth, supporting the recent run-up in share price over the past few months. Nevertheless, while the recent spike may be a signal for investors to take some profit, the future looks very solid for this company in 2007 as well.

Over the past twelve months the P/E ratio 32, when compared to the industry average of 20, may be considered quite high, and it is possible that this company is overbought. Nevertheless, with MedcoHealth's continued strong earning forecast, the forward looking multiple relative to earnings is closer to 18, below the industry's average. In addition, MedcoHealth's forward multiple is also below industry giants Walgreen's 20 P/E ration and Rite Aid's astonishing 102 ration when examining the next twelve months. Moreover, when looking at some of the more profound multiples, MedcoHealth, over the past twelve months has had a price to sales multiple of 0.41, an enterprise value to revenue ratio of 0.44, and an enterprise value to EBITDA ratio of 11.55 as per Capital IQ. When compared to rivals Walgreen's respective numbers of 0.93, 0.91, and 12.60 and CVS's respective 0.62, 0.74, and 10.14, there is some clear advantage MedcoHealth has, especially in the form of revenue. However, as some may argue, the respective numbers Rite Aid has of 0.19, 0.39, and 10.84 are all below MedcoHealth's, and more superiority should be placed on purchasing shares of the former company. However, it is important to understand that the numbers reported here are trailing, and because Rite Aid is expecting earnings to drop significantly, as a result of the high forward EPS multiple, coupled with MedcoHealth's decreasing P/E ratio of almost 50%, over the next twelve months, if predictions are accurate, there should be more favor placed with MedcoHealth's fundamentals. In addition, the debt to equity ratio for MedcoHealth is astonishing low at a number below 0.20 and below Rite Aid's near 1.5 ration. As such is the case, Rite Aid is responsible for now having a higher enterprise value which will drastically configure the enterprise calculations in disfavor of long term shareholders.

Furthermore, excluding Walgreens, MedcoHealth is the only company out of the other two mentioned to have positive leveraged free cash flow, and also MedcoHealth is the only company in the entire industry to have a positive price to cash flow multiple below 100. While some emphasis may be placed on MedcoHealth's poor ROE and ROA of 7.56%, and 5.5% respectively, both which are below industry averages, if the management team, lead by CEO Mr. David B. Snow, can find a way in improving upon the assets and equity received in terms of more productive use, there is a significant prospective MedcoHealth, relative to share price, skyrockets even further. Thus, after looking at the fundamentals, and comparing these numbers to this company's rivals and industry, there is strong potential in 2007 for MedcoHealth to render some unexpected profit for investors.

Nevertheless, looking at the charts and the more technical side, some negative sentiment may be placed with the stagnant price movement over the past year. With a beta near 0 and a 52 week return of 8.97%, falling short of the S&P 500's phenonomenal 14% return and a current share price trading above the 50 and 200 day moving average, some of the fundamental optimism presented in the previous paragraph may be downgraded. Nevertheless, even at the current price of near 60, I still feel MedcoHealth be a steal for investors, as the fundamentals are the most important indicator in driving the share price for this company. Thus, while it may be wise to begin buy shares a dollar or two cheaper, putting money, even at its current share price, will have amazing potential to be maximized over the course of 2007.

Dennis Biray presents advice on all kinds of topics ranging from finance and investing to fitness to sports. For more information email him at dbiray@gmail.com, or to view other articles written by him visit http://www.biraynetworks.co.nr