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Amerisource Bergen: A Good Buy in the Wholesale Drugs Sector
Posted by: Dividend King (IP Logged)
Date: February 16, 2012 09:24AM

Amerisource Bergen (ABC) offers packaging and distribution services to drugs manufacturers across the U.S. and Canada.

Its shares are currently trading around $39, and the mean 12 month price target from analysts researching the stock is $45.33 (17% upside potential). This stock is trading above its 50-day exponential moving average of $38.40 and its 200-day exponential moving average of $38.25. The 50-day EMA has recently moved above the 200-day EMA, a potentially bullish indicator. There is good, solid support for the shares at around $35, though the low over the last 52 weeks is 34.33: a level from which there was an extremely strong bounce in August.

Earnings per share for the last 12 months are $2.59, and these are expected to reach $2.81 in its next fiscal year (ending September 2012). These numbers place the shares on a trailing P/E ratio of 15.43, and a forward multiple of 12.30. Comparing the forward ratio to that of direct competitors Cardinal Health (CAH) and McKesson (MCK) Amerisource trades on a slightly higher rating, though not markedly so. Cardinal Health’s forward multiple is 11.99 and McKesson’s is 11.22.

All three companies pay dividends. Amerisource’s 1.3% yield lies between the 1% yield of McKesson and the 2% yield of Cardinal Health. Amerisource has increased its dividend for seven consecutive years, by an average of 47%. With its dividend covered around five times by its earnings it has room to continue to increase its dividend by an attractive amount for the foreseeable future if it so wishes.

The company holds cash equivalent to $7.07 per share, and has a debt/equity ratio of 47.61. This is easily manageable with its cash flow of $1.17 billion last year. Its business area is low margin: Operating margin at Amerisource is 1.53%, similar to Cardinal’s 1.55% and McKesson’s 1.88%. All three companies have profit margins less than 1%. However, Amerisource’s return on equity (24.28%) is almost 8% higher than its rivals’ returns on equity of 16.6% and 16.64%, respectively.

The company recently completed the $250 million purchase of the reimbursement and data collection, analytical, and reporting service company TheraCom. Of the acquisition, CEO Steve H. Collis said, "The acquisition of TheraCom will significantly increase the size and scope of our consulting services offering and meaningfully expands our reimbursement, adherence and patient access services for pharmaceutical and biotech manufacturers. The addition of TheraCom's capabilities to our market-leading consulting services will provide our manufacturer customers with enhanced solutions to meet the challenges in the changing healthcare landscape, and will help ensure even greater patient access to medication therapies.”

The acquisition will be earnings neutral through 2012, and then earnings positive. This acquisition follows earlier purchases of IntrinsiQ and Premier Source.

I believe that Amerisource has management that is in control of its cost base and seeks to grow organically and by acquisition. Its acquisitions are aimed at diversification and broadening of its business areas, and seem to be well structured financially. It recently announced an issue of $500 million of 3.5% senior notes due in 2021, and also has dispensation to repurchase its shares, which it sees as increasing shareholder value. With a reasonable and growing dividend, and strong return on equity numbers, I strongly believe Amerisource Bergen is a good play in the drugs wholesale sector.


Stocks Discussed: ABC, CAH, MCK,
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Re Amerisource Bergen A Good Buy in the Wholesale Drugs Sector
Posted by: pravchaw (IP Logged)
Date: February 16, 2012 12:04PM

I really like the fact that ABC, free cash flow has been increasing and working capital decreasing. This is translating into high ROE and ROIC. Being in a oligopoly (with CAH and MCK) in drug distribution they are operating within a natural moat in North America.

The shares have had a great run up - so not sure if there is that much margin of safety. I have been long CAH for quite a while and it has given me decent returns.


Stocks Discussed: ABC, CAH, MCK,
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