Senior Fund Manager Colin McQueen of Sanlam FOUR Investments UK Limited says Express Scripts Holding Company’s (ESRX) free cash flow runs historically in a linear fashion.
“Every year, through good times and bad, the free cash flow per share has grown. It has small variations over time, but the overall position is driven by the high return on equity that they have, and by the resilience of the business model, low cyclicality and relatively low reinvestment requirements,” McQueen says.
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McQueen first got involved with the company in 2013, when Express Scripts experienced some hiccups from a merger with Medco and sentiment became negative. McQueen, on the other hand, saw a company in an oligopolistic industry with a lot of free cash generation that was trading at a discount to intrinsic value.
“It has performed pretty well since then,” McQueen says. “We still have 7% free cash flow yield on Express Scripts. So again, for a company with a tremendous track record, to hit our target, it only needs to grow a little bit slower than inflation, and we think it’s more than capable of doing that.”
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