April 2, 2009 - Medco Health Solutions, Inc. (MHS-NYSE) a health care company, provides clinically-driven pharmacy services in the United States, Puerto Rico, Germany, and the Netherlands. The company operates through two segments, Pharmacy Benefit Management (PBM) and Specialty Pharmacy.

The Specialty Pharmacy segment provides specialty pharmacy products and services for the treatment of chronic and complex diseases.

MedcoHealth Solutions offers services, including plan design, clinical management, utilization management, clinical services, pharmacy management, mail-order services, physician services, and Web-based services. It serves industry categories, including various BlueCross/Blue Shield plans; managed care organizations; insurance carriers; third-party benefit plan administrators; employers; federal, state and local government agencies; and union-sponsored benefit plans. The company was founded in 1983 and is based in Franklin Lakes, New Jersey.

When a company reports quarterly sales increases of 14% and then 42% up in earnings per share, it's worthy of some attention, especially in a market where most stocks are reporting losses. Medco delivered those improvements in the fourth quarter of 2008. New clients and higher prices on brand-name drugs accounted for most of the revenue growth. Higher sales of lower cost generic drugs impeded sales a little, but higher mail order and generic drug dispensing rates helped improve margins.

For the fourth quarter, sales were $12.961 billion, up from $11.378 billion in the same quarter of 2007 while earnings per share (eps) were 54 cents, well above 38 cents from the fourth quarter of last year. For the full year, total revenues were $51.258 billion versus $44.508 billion in 2007. EPS for the year was $2.13 compared to $1.63 the previous year. For 2009, the consensus of 21 analysts is for $2.73, then in 2010, eps jumps to $3.23. Projections for first quarter results (due in April) are for an eps of 62 cents vs. 55 cents in the first period of last year. For the second quarter, expect 66 cents compared to 56 cents last year.

Medco actually benefits from the current economic problems. It has higher margins in generic drugs and mail order programs, both more in demand during difficult times. So the bottom line should continue to grow noticeably at least through 2009. In the last 5 years, average annual growth in earnings was 21% with sales increasing on average by 11.5%. In the next 5, analysts see 17% growth in earnings per year on average and sales improvements of 10% a year.

Recently WellPoint, a health insurer, offered its PBM division for sale. It's a natural for Medco to buy, but then it's also a natural for CVS Caremark and Express Scripts, two Medco competitors, to buy. Price will most likely be between $2 billion and $4 billion, a figure Medco should be able to handle with some equity and new long-term debt. Price will reflect the extent to which WellPoint is willing to sign long-term contracts. Medco would most likely stop its share repurchase program for a while if it won the WellPoint deal.

More numbers: Market Cap is $20.7 billion. Forward P/E is 13. Price to Book is 3.42. Operating margin for the last 12 months was 3.97% with a Profit margin of 2.15%. There's $1 billion in cash in the bank. Total debt is $4.6 billion. Current ratio is 1.224. Book Value per share is $12.08.
Beta is .51. 52-week high was $52 on April 28, 2008, low was $29.80 on October 27, 2008. There are 491 million shares outstanding and a float of 488.4 million. Insiders own .11% of the stock while institutions have 79.60%. There is no dividend.

Medco held up relatively well in the last year of market devastation. It dipped in the October/ November crack but bounced back. If it buys the WellPoint division, debt will increase but so will revenues and most likely profits. This is a company that is well managed with numbers that suggest continued solid growth. This stock should be a good defensive addition to any portfolio if, after more extensive research, it fits within an investor's risk profile.

Company Web site: www.medco.com

- Ted Allrich