ABC Offers Growth At A Healthy Price

2/8/2010


  Recent Price
$29
  Dividend
$0.32
  Yield

1.1%

  P/E Ratio
16
  Shares (millions)
291
  Long-Term Debt as % of Capital
33%
  52-Week Price Range
$28.61 - $13.75

Shares of AmerisourceBergen ($29; ABC), the third-largest wholesale drug distributor in the U.S., have surged 45% since July, partly in anticipation of health-care reform that seemed likely to pass until a few weeks ago.

Yet the stock has held firm as prospects for comprehensive health-care legislation have dimmed, partly because of impressive December-quarter results and raised guidance for 2010. Amerisource now expects per-share-profit growth of 12% to 17% on revenue growth of 7% to 8% for fiscal 2010 ending September.

Despite its strong operating and price momentum, the stock still sports a reasonable valuation. Shares trade at 16 times trailing earnings, 10% below the five-year average. Amerisource is a Focus List Buy and a Long-Term Buy.

Business breakdown

The specialty group supplies pharmaceuticals to physicians who specialize in diseases, particularly cancer, as well as some specialty clinics. More than half of the specialty business involves generic and oncology drugs, though it also distributes vaccines, plasma, and other blood products. The unit’s sales rose 7% in fiscal 2009 ended September and 8% in the December quarter. The group accounted for 22% of total revenue in 2009.

Amerisource’s drug group, which distributes generic and branded pharmaceuticals to hospitals and pharmacies, managed 2% revenue growth in fiscal 2009 and 13% growth in the December quarter. The unit also provides equipment and services for pharmacy management.

The company’s third segment, a packaging group, repackages bulk drugs into blister packs and bottles.

In fiscal 2009, Amerisource derived 68% of sales from institutional customers, with retail customers making up the balance. Medco Health Solutions ($64; MHS) accounted for 17% of revenue, while no other customer represented more than 5%. Amerisource also negotiates contracts with purchasing organizations that buy drugs for health-care providers.

While health-reform efforts have stalled, Amerisource’s drug volumes are likely to benefit if a scaled-down health bill passes. Following a special election in Massachusetts, Democrats lost the Senate seat needed to block a Republican filibuster of the health-care bill. That leaves the massive health-reform effort on life support, and the best chance for resuscitation could come in the form of a less comprehensive bill.

Instead of extending coverage to 30 million more Americans, blanketing about 95% of the population, some legislators are calling for compromise legislation that would cover perhaps 12 million to 15 million additional Americans.

Conclusion

The company has delivered annualized dividend growth of 67% over the last five years, including two hikes in 2009. Amerisource also buys back shares aggressively. The share count shrunk at an annualized rate of 8% over the last five years.

Amerisource rallied after the company raised fiscal 2010 sales and profit guidance on Jan. 26. Key sales drivers are new contracts and increased distribution of specialty and generic drugs. 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

Dec '09 $0.44 vs. $0.36 + 12% $26.58 -

$21.44

16 - 13
Sep '09 0.44 vs. 0.37 + 9% 22.84 - 17.54 14 - 11
Jun '09 0.42 vs. 0.35 + 35% 18.99 - 15.90 12 - 10
Mar '09 0.48 vs.

0.41

- 3% 19.55 - 13.75 13 - 9
           
Year
(Sep.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2009 $71.76 $1.70 $0.21 $22.84
-
$13.33 13 - 8
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
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
98 89 82 90 53 90 85

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


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