AmerisourceBergen Is a Center Piece in the Pharma Industry
In this article, let's take a look at AmerisourceBergen Corporation (ABC), a $17.44 billion market cap company, which is a distributor of pharmaceutical products and related health care services that was formed via the merger of Amerisource Health Corp. and Bergen Brunswig Corp.
Fierce competition
The business of distribution of pharmaceuticals and related health care solutions is extremely competitive. Competitors include Cardinal Health, Inc. (CAH) and McKesson Corporation (MCK); as well as it competes with regional and local distributors, direct-selling manufacturers, warehousing chain drugstores, specialty distributors, and packaging and health care tech companies. The company plays a critical role within the pharmaceutical industry because other participants depended on it.
Walgreen partnership
AmerisourceBergen signed a strategic agreement with Walgreen (WAG) where it is going to handle the pharmaceutical distribution. The deal will reduce costs, while providing daily delivery of drugs, which we consider very positive for generating profits and returns. It has exceeded initial growth and profit expectations reflecting the huge scale achieved and its efficiency.
Pharmaceutical market
The company made efforts to participate on the rapid growth of the drug market and so it is the largest specialty drug distributor in the U.S. We think it is important to mention that the firm has one of the lowest cost operating structures among its peers, and this should provide the firm with a continued success on the bottom line.
Revenues, margins and profitability
Looking at profitability, the firm is the second largest pharmaceutical distributor by revenue. They grew by 38.53% but earnings per share decreased in the most recent quarter compared to the same quarter a year ago (-$0.06 vs $0.27). The net income has decreased by 107.6% when compared to the same quarter one year ago, falling from $168.44 million to -$12.78 million.
Finally, let�s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
Ticker | Company | ROE (%) |
ABC | AmerisourceBergen | 11.68 |
HSIC | Henry Schein Inc | 16.33 |
PMC | Pharmerica Corp | -1.45 |
DVCR | Diversicare Healthcare Services Inc. | -58.3 |
MCK | McKesson Corp | 15.17 |
Industry Median | 10.87 |
The company has a current ROE of 11.68% which is higher than the industry median and the ones exhibit by Pharmerica (PMC) and Diversicare Healthcare Services (DVCR). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Henry Schein (HSIC) and McKesson could be the options. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 71.4x, trading at a premium compared to an average of 26.9x for the industry. To use another metric, its price-to-book ratio of 8.8x indicates a premium versus the industry average of 2.61x while the price-to-sales ratio of 0.2x is above the industry average of 0.46x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $38.036, which represents a 30.7% compound annual growth rate (CAGR).
The share price has jumped by 27.01% in the last year.
Final comment
Although we have seen some weaknesses, we believe there will be an interesting growth in the pharmaceutical industry over the long-term. The delivery of pharmaceuticals made AmerisourceBergen a key role in the supply chain. With about $100 billion in revenues, the company has a size favored by deals made with major companies.
Hedge fund gurus like Jim Simons (Trades, Portfolio) and Ken Fisher (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
This article first appeared on GuruFocus.
