AmerisourceBergen Corporation (ABC, Financial) is a $22.46 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.
The company is one of the top three pharmaceutical distributors, with more than $120 billion in annual revenues. The distribution of pharmaceuticals and related healthcare solutions is extremely competitive, with competitors such as Cardinal Health, Inc. (CAH, Financial) and McKesson Corporation (MCK, Financial).
AmerisourceBergen is the largest specialty drug distributor in the U.S., with several companies depending on it. The firm operates with lower cost operating structures, which makes margins attractive.
On analyzing the long term drivers, it's clear that acquisitions have been an important part for growth. In the past, it had signed an agreement with Walgreens (WAG) in order to handle the pharmaceutical distribution or the acquisition of MWI Veterinary Supply, an animal supply distributor should provide higher scale as well as better efficiency.
Outlook
We believe the pharma industry will experience great growth in the next few years due to demographic reasons like an older population. Further, it should benefit with the expansion of medical insurance coverage.
Strong Earnings Growth
Looking at profitability, revenue increased by 12.8% and earnings per share tremendously increased in the third quarter compared to the same quarter a year ago ($0.89 vs -$0.06).
The net income increased by 1775.8% in the same comparison, to $214.16 million from -12.78 million.
| Balance Sheet & IncomeStatement | Q3 FY15 | Q3 FY14 |
| Net Sales | 34,233.56 | 30,348.15 |
| EPS | 0.89 | -0.06 |
| Net Income | 214.16 | -12.78 |
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 | 49.07 |
| HSIC | Henry Schein Inc | 16.66 |
| PMC | Pharmerica Corp | 4.93 |
| DVCR | Diversicare Healthcare Services Inc. | 44.76 |
| MCK | McKesson Corp | 18.80 |
| Â | Industry Median | 9.65 |
The company has a current ROE of 49.07%, which is higher than the industry median and its peers: Henry Schein (HSIC, Financial), Pharmerica (PMC, Financial), Diversicare Healthcare Services (DVCR, Financial) and McKesson.
It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
| Quarter Ended | Mar-15 | Jun-15 | Sep-15 | Dec-15 | Mar-15 | Jun-15 | Sep-15 | Dec-15 | Mar-15 | Jun-15 |
| ROE (%) | 7.79 | 28.28 | 8.62 | 7.25 | 32.79 | -2.47 | 13.76 | -42.94 | -111.47 | 49.07 |
Relative Valuation
In terms of valuation, the stock sells at a forward P/E of 19.2x, which is quite attractive. To use another metric, the P/B Ratio (=15.95) is close to 10-year high of 17.26, but the P/S ratio is lower than the industry median.
The share price has jumped by almost 38% when compared to its closing price of one year ago. Further, the year to date (YTD) return for the stock is 15.22%.
Final Comment
As outlined in the article, we see an interesting growth in the pharmaceutical industry over the long term. With more than $120 billion in revenue, the company has a size favored by acquisitions.
Pioneer Investments has upped its stake by 425.04% to 40,076 shares, which makes me feel comfortable with my bullish sentiment on this stock.
Disclosure: Omar Venerio holds no position in any stocks mentioned
