Though earnings season continues to wind down this week, those seeking option trading opportunities still have plenty to choose from with more than 40 S&P 500 companies reporting. Real estate, gold miners, and biotech are among the more notable sectors with a significant number of constituent companies on the schedule.
We’re going to go in a different direction today by taking a closer look at pharmacy benefit manager (PBM) Express Scripts (NASDAQ: ESRX). The company is set to release Q4 earnings after the close on Wednesday, with analysts expecting a 43% increase from a year ago. That’s a little more than the company has averaged over the past four quarters, but less than last quarter. So there’s not much to be gleaned there from an expectations standpoint.
Analysts apparently have a real good feel for ESRX based on how far the actual earnings numbers differ from the consensus estimate. The stock hasn’t missed an estimate going back to April 2005. But it hasn’t blown out any estimates either. The biggest difference has been a whopping four cents (a 9% upside surprise), while the actual number has either met or beaten consensus estimates by a penny in 15 of the past 23 quarters. Not much revealing here either.
The main thing we like about ESRX, though, is how it does after earnings. Over the past four quarters, the stock has gained ground in both the one- and two-week periods following earnings. In fact, the shares have averaged a 7.5% advance in the two weeks following the past four reports. Now that’s something to sink our trading teeth into.
On the charts, ESRX is bouncing higher off its 20-day moving average as it attempts to reclaim the all-time high territory reached in mid-January. Overhead call open interest is light, so the path higher is relatively clear.
Express Scripts Chart
PBMs such as ESRX are expected to benefit going forward as a number of blockbuster drugs go generic, as cheaper drugs add more sales volume. That puts ESRX in a sweet spot for the next couple of years. With a strong outlook combined with the company’s flawless earnings track record and recent post-earnings price strength, look for the stock to take out its all-time high within the next couple of weeks.
We recommend buying the ESRX March 57.50 Call in the range of $2.40.
