Change Won't Faze AmerisourceBergen

7/20/2009


  Recent Price
$18
  Dividend
$0.24
  Yield

1.3%

  P/E Ratio
12
  Shares (millions)
305
  Long-Term Debt as % of Capital
30%
  52-Week Price Range
$22.23 - $13.33

After years of industry consolidation, AmerisourceBergen ($18; ABC) is one of the last large, independent drug distributors. While the weak economy has hurt prescription volumes and slowed Amerisource’s sales growth, the company delivered per-share-profit growth of 14% in the 12 months ended March.

In a business typified by thin profit margins, Amerisource is known for keeping costs under control. Created by a 2001 merger, Amerisource has consolidated its distribution centers and now operates only about half as many facilities as eight years ago.

Amerisource sells brand-name and generic pharmaceuticals, over-the-counter health products, and home-health-care supplies and equipment. The company’s leverage to generics represents a competitive advantage. Generic drug volumes are rising faster than branded volumes, a trend likely to gain steam during the Obama administration. Amerisource is a Long-Term Buy.

Business mix

Representing about 21% of annual sales, the specialty-drug group distributes high-margin biotechnology and oncology drugs. Amerisource expects specialty-drug sales to rise 5% to 7% for the six months ending September. The company generates most of the rest of its revenue from the distribution of other branded and generic pharmaceuticals and medical equipment to hospitals and pharmacies. A packaging unit, accounting for less than 1% of revenue but 5% of operating profits, repackages bulk drugs into consumer-sized bottles and blister packs.

Amerisource collected 68% of fiscal 2008 sales from the institutional market, which includes hospitals, acute-care facilities, and mail-order companies. The remaining sales came from retail outlets, primarily independent or regional drugstores and supermarkets. Amerisource’s focus on small, independent retailers helps prevent the company from relying too much on any one client.

In the March quarter, Amerisource boosted its cash holdings by 39% from the December quarter. Free cash flow rose 9% over the past 12 months. A strong balance sheet and solid cash flow give Amerisource the flexibility to pay down its long-term debt and make acquisitions.

Conclusion

Amerisource anticipates per-share profits of $1.59 to $1.65 in fiscal 2009, up 10% to 15%. In comparison, total U.S. pharmaceutical sales are likely to fall in the current calendar year, their first decline in more than 50 years. The long view looks better. Any move to help the millions of uninsured Americans gain coverage should help the distribution industry as a whole and Amerisource in particular.

Amerisource is slated to report June-quarter earnings on July 30.
The consensus projects per-share-profit growth of 5% for the quarter, 12% for fiscal 2009 ending September, and 10% for fiscal 2010. These modest growth projections reflect a gloomy economic backdrop, and the 2010 estimate in particular could prove conservative. At 11 times expected year-ahead earnings, Amerisource shares trade well below their three-year average forward P/E ratio of 15. An annual report for AmerisourceBergen Corp. is available at 1300 Morris Drive, Chesterbrook, PA 19087; (610) 727-7000; www.amerisourcebergen.com.

 

AMERISOURCEBERGEN
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Mar '09 $0.48 vs. $0.41 - 3% $19.55 -

$13.75

13 - 9
Dec '08 0.37 vs. 0.31 + 0% 18.78 - 13.33 13 - 9
Sep '08 0.37 vs. 0.31 + 5% 22.23 - 18.30 16 - 13
Jun '08 0.35 vs.

0.35

+ 10% 21.49 - 19.45 16 - 14
           
Year
(Sep.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2008 $70.19 $1.44 $0.15 $24.30
-
$18.30 17 - 13
2007 $66.07 $1.32 $0.10 28.28
-
21.33 21 - 16
2006 $61.20 $1.13 $0.05 24.48
-
18.33 22 - 16
2005 $54.58 $0.83 $0.03 19.76
-
12.56 24 - 15
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
93 78 87 83 50 88 55

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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