AmerisourceBergen Corporation (ABC) is the second largest pharmaceutical drug distributor in the United States, and is currently ranked #8 in the Fortune 500 list and #23 in the Global 500 list. The company plays a vital role in the U.S. healthcare system.
ABC generated decent growth in its last reported quarter. Its shares of ABC have gained 17.1% year-to-date, and 16.2% over the past nine months.
And given the relatively inelastic demand for prescription drugs, ABC is expected to witness stable growth in its financials. In fact, we think the company’s latest strategic acquisitions should streamline its operations significantly, thereby strengthening its market reach.
Click here to checkout our Healthcare Sector Report for 2021
Here’s what could shape ABC’s performance in the near term:
Strategic Acquisition
ABC last month acquired a majority stake in Walgreens Boots Alliance’s Alliance Healthcare businesses for $6.28 billion in cash and 2 million ABC shares. The acquisition is expected to expand ABC’s reach and solutions in pharmaceuticals and manufacturer services and advance its ability to provide innovative global healthcare solutions. ABC has raised its fiscal year 2021 EPS guidance slightly to $9.10. The company expects its revenues to grow in the high-single digit percentage range to at least $210 billion.
ABC used net proceeds of approximately $1.53 billion from a senior notes offering in March to finance the Walgreens Boots Alliance’s Alliance acquisition.
PharMEDium Unit Closure
In January last year, ABC closed its compounding pharmacy business, PharMEDium, following more than two years of operational and regulatory complications. The unit’s commercial operations were temporarily halted under Department of Justice and FDA mandates in 2018 and 2019. In addition to lost revenues, ABC incurred $130 million in pre-tax remediation expenses in its fiscal years 2018 and 2019, $570 million in pretax impairment charges in 2019, and a $138 million impairment charge in the first quarter of 2020.
Growth Potential
Analysts expect ABC’s revenues to rise 16.7% in the current quarter (ending September 2021), 11% in the current year, and 12.3% in 2022. Consensus EPS estimates indicate a 21.7% year-over-year increase in the current quarter,14.4% in 2021, and 16.9% next year. Also, the company’s EPS is expected to rise at a 12.3% rate per annum over the next five years.
ABC has an impressive earnings surprise history; it beat Street’s EPS estimates in each of the trailing four quarters.
Trading at a Discounted Valuation
In terms of non-GAAP forward P/E, ABC is currently trading at 12.75, which is 47.9% lower than the 24.45% industry average. The stock’s 1.12 non-GAAP forward PEG ratio is 44.1% lower than the industry average of 2.
Furthermore, ABC’s 0.11 and 9.71 respective forward Price/Sales and Price/Cash Flow multiples are significantly lower than the 7.86 and 18.63 industry averages.
Consensus Rating and Price Target Indicate Potential Upside
Of the eight Wall Street analysts that rated ABC, four rated it Buy while four rated it Hold. Their $133.13 12-month median price target indicates a potential 16.3% upside. Their price targets range from a low of $117.00 to a high of $156.00.
POWR Ratings Show Promise
ABC has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
ABC has a B grade for Stability, Value, and Growth. The stock’s relatively low 0.54 beta and discounted valuation with respect to its peers justify its Stability and Value grades. The company’s revenues and net income increased at 7.2% and 7.3% CAGRs, respectively, over the past three years, which is in sync with the Growth grade.
Of the 80 stocks in the Medical – Services industry, ABC is ranked #15.
Beyond what we’ve stated above, we have rated ABC for Momentum, Sentiment, and Quality. Click here to view all ABC ratings.
View the top-rated stocks in the Medical – Services industry here.
Bottom Line
ABC is one of the biggest companies in the drug distribution space. Given the company’s latest acquisition and non-cyclical nature of the industry, we think it is likely to witness sustainable growth in the future. Thus, ABC should be a valuable addition to one’s portfolio now.
Click here to checkout our Healthcare Sector Report for 2021
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About the Author: Aditi Ganguly
Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.
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