Express Scripts Holding Co. (NASDAQ:ESRX)

An analysis of the economic value added reveals a consistent failure to generate positive economic profit over the five-year period from 2013 to 2017. While the company remained in a state of economic value destruction, there was a notable trend of improvement in the magnitude of these losses until a slight reversal occurred in the final year of the period.

Net Operating Profit After Taxes (NOPAT)

A sustained upward trajectory in NOPAT is observed between 2013 and 2016, rising from $1.82 billion to a peak of $3.38 billion. This indicates a substantial increase in operational profitability during this window. However, this growth trend plateaued in 2017, with NOPAT experiencing a slight decline to $3.27 billion.

Invested Capital and Cost of Capital

Invested capital showed a general downward trend from 2013 to 2016, decreasing from $41.29 billion to $35.71 billion, which suggests a reduction in the capital base required to support operations. This trend reversed in 2017, as invested capital increased to $37.01 billion. Meanwhile, the cost of capital remained relatively stable, fluctuating within a narrow range between 12.48% and 13.72%, with a slight overall decrease from the 2014 peak.

Economic Profit Trends

Economic profit remained negative throughout the entire analyzed period, signaling that the returns generated from operations were insufficient to cover the cost of the capital employed. Despite the persistent deficit, the economic loss narrowed significantly from $3.78 billion in 2013 to $1.08 billion in 2016. This improvement was the result of combined operational growth (higher NOPAT) and capital efficiency (lower invested capital). The progress was partially offset in 2017, as the economic loss widened to $1.37 billion, driven by the simultaneous decrease in NOPAT and the increase in invested capital.

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.

An analysis of the economic value added metrics indicates a period of sustained negative economic profit, suggesting that the returns generated on invested capital did not exceed the cost of capital throughout the five-year period. However, a distinct trend of recovery is evident from 2013 to 2016, followed by a slight regression in 2017.

Economic Profit Trends

Economic profit remained negative from 2013 through 2017, but showed significant narrowing losses for the majority of the period. The economic loss decreased from approximately 3.78 billion USD in 2013 to a low of 1.08 billion USD in 2016. This positive trajectory was interrupted in 2017, as the economic loss widened again to 1.37 billion USD.

Economic Spread Ratio Analysis

The economic spread ratio closely mirrors the trend of the economic profit. A consistent improvement was observed between 2013 and 2016, with the ratio moving from -9.15% to -3.03%. This indicates a narrowing gap between the company's actual return on capital and its required rate of return. In 2017, the ratio deteriorated slightly to -3.69%, signaling a marginal decrease in capital efficiency.

Invested Capital Dynamics

Invested capital exhibited a steady downward trend from 2013 to 2016, decreasing from 41.29 billion USD to 35.71 billion USD. This reduction in the capital base coincided with the improvement in both economic profit and the spread ratio. This pattern suggests that the company may have been optimizing its capital structure or divesting underperforming assets to reduce the cost of capital. This trend reversed in 2017, as invested capital increased to 37.01 billion USD, which aligned with the observed decline in the economic spread ratio.

Between 2013 and 2017, the company operated with consistently negative economic profit, indicating that the returns generated were insufficient to cover the cost of capital. However, the period is characterized by a general trend of improvement in economic efficiency from 2013 through 2016, followed by a slight reversal in 2017.

Revenue Stability

Revenues remained relatively stagnant throughout the analyzed period, fluctuating within a narrow range around the 100 billion USD mark. After a peak of 104.1 billion USD in 2013, revenues stabilized between 100.1 billion USD and 101.8 billion USD from 2014 to 2017, suggesting that the changes in economic profit were driven by factors other than top-line growth.

Economic Profit Trajectory

A sustained reduction in economic losses was observed between 2013 and 2016. The economic profit improved from -3.78 billion USD in 2013 to a period low of -1.08 billion USD in 2016. This recovery trend was interrupted in 2017, as the economic profit declined again to -1.37 billion USD, erasing a portion of the gains achieved in previous years.

Economic Profit Margin Analysis

The economic profit margin mirrored the trend of absolute economic profit, narrowing from -3.63% in 2013 to -1.08% in 2016. This narrowing suggests an increase in operational efficiency or a reduction in the capital charge relative to revenues. The subsequent shift to -1.37% in 2017 indicates a marginal decrease in the ability to generate value above the required cost of capital.