Express Scripts Holding Co. (NASDAQ:ESRX)

The period between 2013 and 2017 demonstrates a consistent, though fluctuating, pattern in financial performance as measured by economic profit. Net operating profit after taxes (NOPAT) generally increased over the five-year period, while the cost of capital remained relatively stable. However, invested capital decreased overall, contributing to the observed trends in economic profit.

NOPAT Trend

NOPAT exhibited an increasing trend from 2013 to 2016, rising from US$1,817,712 thousand to US$3,375,341 thousand. A slight decrease was then observed in 2017, with NOPAT falling to US$3,274,103 thousand. This suggests improving operational profitability for the majority of the period, followed by a minor contraction in the final year.

Cost of Capital

The cost of capital fluctuated modestly between 10.99% and 12.05% during the analyzed period. It began at 11.91% in 2013, peaked at 12.05% in 2014, and then generally declined to 11.05% in 2017. These changes were relatively small and did not appear to have a dramatic impact on economic profit.

Invested Capital

Invested capital experienced a consistent decline from 2013 to 2016, decreasing from US$41,289,230 thousand to US$35,712,343 thousand. A modest increase was noted in 2017, bringing the invested capital to US$37,007,152 thousand. This reduction in capital employed likely reflects strategic decisions regarding asset allocation or operational efficiency.

Economic Profit

Economic profit remained negative throughout the entire period, indicating that the company’s returns did not exceed its cost of capital. The magnitude of the economic loss decreased from US$-3,098,756 thousand in 2013 to US$-550,115 thousand in 2016, representing a significant improvement. However, economic profit worsened in 2017, increasing the loss to US$-814,663 thousand. This suggests that while the company improved its ability to generate profit relative to its capital base, it still did not achieve positive economic profit, and the gains were partially reversed in the final year.

In summary, while NOPAT generally increased, the reduction in invested capital and the consistently negative economic profit suggest that the company faced challenges in generating returns exceeding its cost of capital. The improvement in economic profit between 2013 and 2016 was encouraging, but the reversal in 2017 warrants further investigation.

Net Income Attributable to Express Scripts

The net income attributable to the company showed a consistent upward trend throughout the five-year period. Starting from approximately 1.84 billion US dollars in 2013, the net income increased annually, reaching about 4.52 billion US dollars by the end of 2017. This represents a more than doubling of net income over the duration analyzed, indicating strong profitability growth.

Net Operating Profit After Taxes (NOPAT)

The NOPAT figures likewise showed an overall increasing trend, rising from roughly 1.82 billion US dollars in 2013 to over 3.27 billion US dollars in 2017. The growth is generally steady, with an especially notable increase between 2015 and 2016. However, unlike net income, NOPAT slightly declined in 2017 compared to the previous year, decreasing from approximately 3.38 billion to 3.27 billion US dollars.

Comparative Insights

Both net income and NOPAT demonstrate sustained profitability improvements over the analyzed timeframe, highlighting effective operational and financial management. The disparity in 2017, where net income continued rising but NOPAT decreased, may suggest changes in operating efficiency, tax impact, or other factors affecting post-tax operating profits.

Provision for Income Taxes

The provision for income taxes exhibits fluctuation over the five-year period. It begins at 1,104,000 thousand US dollars at the end of 2013, then decreases slightly in 2014 to 1,031,200 thousand US dollars. A notable increase occurs in 2015, with the provision reaching 1,364,300 thousand US dollars, followed by a decline in 2016 to 999,500 thousand US dollars. By the end of 2017, there is a significant drop to 397,300 thousand US dollars, marking the lowest figure in the observed timeframe.

Cash Operating Taxes

Cash operating taxes demonstrate more variability with an overall upward trajectory throughout the period. Starting at 1,890,614 thousand US dollars in 2013, the amount decreases to 1,669,615 thousand US dollars in 2014. Subsequently, a sharp increase is observed in 2015, reaching 2,004,540 thousand US dollars. In 2016, cash operating taxes decline again to 1,743,214 thousand US dollars before climbing significantly to 2,292,125 thousand US dollars by the end of 2017, the highest level recorded in the five years.

Comparative Observations

Overall, the provision for income taxes and cash operating taxes do not follow the same trend patterns. While the provision for income taxes peaks in 2015 before steadily declining to its lowest point in 2017, cash operating taxes show a general increasing trend despite year-to-year fluctuations. The divergence between these two tax-related metrics may suggest differences in tax accounting policies, timing differences, or changes in cash flow management relating to tax obligations.

Total Reported Debt & Leases

The total reported debt and leases show a fluctuating trend over the five-year period. The value decreased slightly from approximately 14.27 billion USD at the end of 2013 to about 13.86 billion USD in 2014. However, from 2014 onward, the debt increased steadily, reaching around 16.25 billion USD by the end of 2017. This reflects a rising leverage position in the latter years.

Total Express Scripts Stockholders’ Equity

Stockholders’ equity demonstrates a declining trend from 2013 through 2016, dropping from roughly 21.84 billion USD in 2013 to about 16.24 billion USD in 2016. This decline represents a significant reduction in equity over this period. Notably, in 2017, there is a reversal of this downward trend with equity increasing to about 18.12 billion USD, suggesting a partial recovery or accumulation of retained earnings or capital injection during that year.

Invested Capital

Invested capital also declined consistently from 2013 to 2016, moving from approximately 41.29 billion USD to around 35.71 billion USD. In 2017, a modest increase to about 37.01 billion USD is observed. This trend indicates a contraction in the total capital employed by the company initially, followed by a slight expansion towards the end of the period.

The economic spread ratio demonstrates a consistent, though fluctuating, improvement over the five-year period. Initially negative, the ratio moved closer to zero, indicating a diminishing gap between the return on invested capital and the cost of capital. However, the rate of improvement slowed and even reversed in the final year observed.

Economic Spread Ratio Trend

The economic spread ratio began at -7.50% in 2013 and improved to -1.54% in 2016. This represents a substantial reduction in the negative spread, suggesting increasing efficiency in capital allocation or improved profitability relative to the cost of capital. However, in 2017, the ratio worsened to -2.20%, indicating a reversal of this positive trend.

Economic profit also exhibited a trend of decreasing losses. While remaining negative throughout the period, the magnitude of the loss diminished from approximately negative 3.1 billion US dollars in 2013 to negative 0.55 billion US dollars in 2016. The increase in economic profit loss in 2017, coinciding with the worsening economic spread ratio, suggests a potential correlation between capital efficiency and overall profitability.

Invested Capital

Invested capital decreased from 41.3 million US dollars in 2013 to 35.7 million US dollars in 2016, before increasing slightly to 37.0 million US dollars in 2017. This decrease in capital employed during the initial period may have contributed to the improvement in the economic spread ratio, as a lower capital base requires a lower absolute return to achieve the same percentage spread. The subsequent increase in invested capital in 2017 could be a contributing factor to the decline in the economic spread ratio.

The interplay between economic profit, invested capital, and the economic spread ratio suggests a complex relationship. While the initial trend indicated improving capital efficiency and profitability, the 2017 results warrant further investigation to determine the underlying causes of the reversal and assess the sustainability of future performance.

The economic profit margin exhibited a consistent, albeit fluctuating, improvement over the five-year period. Initially negative, the margin demonstrated a trend toward less negative values, suggesting an increasing ability to generate returns exceeding the cost of capital. However, the rate of improvement varied across the observed years.

Economic Profit Margin Trend

In 2013, the economic profit margin stood at -2.98%. This figure improved to -2.68% in 2014, indicating a modest increase in profitability relative to capital employed. The margin continued to improve in 2015, reaching -1.82%, representing a more substantial gain. A significant positive shift occurred in 2016, with the margin reaching -0.55%, the highest value within the observed period. However, in 2017, the margin slightly deteriorated to -0.81%, suggesting a potential reversal of the positive trend.

The movement in economic profit mirrors the trend in the economic profit margin. While remaining negative throughout the period, economic profit decreased in absolute value from approximately -3.1 billion US dollars in 2013 to -0.8 billion US dollars in 2017. This reduction in the magnitude of the loss aligns with the improving economic profit margin.

Revenue Analysis

Revenues experienced a slight decline from 104.1 million US dollars in 2013 to 100.1 million US dollars in 2017. This decrease in revenue occurred concurrently with the improvement in the economic profit margin, suggesting that the margin improvement was not driven by revenue growth but rather by changes in cost management or capital efficiency. The revenue figures remained relatively stable between 2014 and 2017, fluctuating within a narrow range.

The observed trend in economic profit margin suggests a strengthening financial performance, despite a modest decline in revenues. The company appears to be becoming more effective at converting revenue into economic profit, although it has not yet achieved positive economic profit. The slight deterioration in the margin during 2017 warrants further investigation to determine the underlying causes and assess whether it represents a temporary fluctuation or the beginning of a new trend.