Medco Health Solutions Soars on Strong Guidance for 2011

Medco Health Solutions (MHS) is a leading pharmacy benefit management provider and a recent addition to the Net Payout Yields Portfolio (available from Covestor.com soon). How could an investor have predicted strong earnings and the incredible recovery in the stock of MHS from a low of below $44 at the end of August to the $57 current price in 2 months?

Well, actually rather easily because MHS spent Q1 and Q2 buying some 8% of their outstanding stock. Management signaled that the stock was too cheap in the mid $50 range so why were investors so reluctant to buy in the $40s. Good question to us. During the last quarter they bought another 4% of the outstanding stock placing the Net Payout Yield at 12.7% based on current stock price. Or a nearly 17% annualized run rate since this total only factors in the last 3 quarters.

During Q3, MHS bought back $903M or 17.1M shares of stock. The unfortunate news is that it appears management was unable to purchase shares in the $40s when the stock swooned. The Q3 average purchase price was over $52. Though, it also shows that the current price is seen as still very attractive.

 Long term, MHS is targeting 12-17% EPS growth in 2011. Using just a 15x multiple and the stock should trade around $60 with the $4 EPS goal. In a better market, MHS could easily fetch a 20x multiple placing todays price at a relatively cheap value.

One thing you can guarantee, if this stock remains this low the company will provide the floor for the stock. Hence, companies with buybacks are so attractive.  Not to mention that the buybacks increase EPS providing for the constant ability to up estimates. Something that Wall Street just seems to love.


via PR:

Share Repurchase Programs

During the third quarter of 2010, Medco repurchased a total of 17.1 million shares at a total cost of $903.5 million and an average per-share cost of $52.81. Through the end of the third quarter, year-to-date 2010 share repurchases totaled 54.2 million shares at a total cost of $3.161 billion and an average per-share cost of $58.37. On an inception-to-date basis, since share repurchases commenced in 2005, Medco repurchased a total of 240.4 million shares at a total cost of $10.1 billion and an average per-share cost of $42.01.

There have been no repurchases in the fourth-quarter 2010 to date. Medco has approximately $1.4 billion remaining of the $3.0 billion authorization that was approved in May 2010.

Raises and Narrows 2010 Guidance Range

Medco raised and narrowed the full-year 2010 GAAP diluted EPS range to $3.14 to $3.16, representing growth of 20 to 21 percent over 2009. The previous GAAP diluted EPS guidance range was $3.10 to $3.15. Medco raised and narrowed the full-year 2010 diluted EPS range, excluding the amortization of intangible assets from the 2003 spin-off, to $3.38 to $3.40, representing growth of 19 to 20 percent over 2009. The previous diluted EPS guidance range was $3.34 to $3.39.

Provides 2011 Guidance and Revises Non-GAAP EPS Measure

Medco provided full-year 2011 GAAP diluted EPS guidance of $3.53 to $3.66, representing growth of 12 to 17 percent over the raised and narrowed 2010 guidance.

While this measure will not be used in 2011, diluted EPS excluding intangible amortization from the 2003 spin-off is guided to increase to a range of $3.80 to $3.93, representing growth of 12 to 16 percent over the raised and narrowed 2010 guidance.

The non-GAAP diluted EPS measure will be changed commencing in 2011 to exclude all intangible amortization, resulting in diluted EPS excluding all intangible amortization in the guidance range of $3.99 to $4.12, representing growth of 12 to 17 percent over the 2010 full-year equivalent of $3.53 to $3.55 (please see Table 9).