In this article, let's take a look at AmerisourceBergen Corporation (ABC, Financial), a $20.03 billion market cap company that is a distributor of pharmaceutical products and related health care services that wasformed via the August 2001 merger of Amerisource Health Corp. and Bergen Brunswig Corp.
Strategic agreement
The company is one of the three major pharmaceutical distributors. Revenues close to $100 billion support this theory. It is the second largest pharmaceutical distributor by revenue and is the main supplier to large pharmacy outlets Walgreen Co. (WAG, Financial) and Express Scripts (ESRX, Financial) Mail Order Pharmacy.
Last year the company entered into a 10-year agreement with Walgreen and Alliance Boots GmbH. The deal consists of the distribution of branded and generic drugs to Walgreens. The volume from this agreement will generate more power to Amerisource, for example at the time to make purchases. Being the supplier of higher-margin generic drugs is a driver for profits and returns in the near future. Efforts done by management during this year have consolidated a good growth and profit expectations from this partnership. The company now has a bigger scale, leverage, and gained efficiency with this operation.
This was not the first agreement in the company´s history. In 2012, it acquired World Courier Group searching for better service offerings to global drug manufacturers.
Revenues, margins and profitability
Looking at profitability, revenue grew by 29.09% led earnings per share increased in the most recent quarter compared to the samequarter a year ago ($0.29 vs $0.22). During the past fiscal year, the company reported lower earnings of $1.20 versus $2.10 in the previous year. This year, Wall Street expects an improvement in earnings ($4.45 versus $1.20).
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 | 12.97 |
| MCK | McKessonCorp | 15.39 |
| OMI | Owens & Minor Inc | 7.89 |
| AET | Aetna Inc | 15.21 |
| CAH | Cardinal Health Inc | 17.04 |
| Â | Industry Median | 11.14 |
The company has a current ROE of 12.97% which is higher than the industry median and the one exhibit by Owens & Minor (OMI, Financial).In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, McKesson (MCK, Financial), Aetna (AET, Financial) and Cardinal Health (CAH, Financial) could be attractive options. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 79.0x, trading at a premium compared to an average of 26.4x for the industry. To use another metric, its price-to-book ratio of 10.5x indicates a premium versus the industry average of 2.94x while the price-to-sales ratio of 0.2x is below the industry average of 0.97x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $39,198, which represents a 31.5% compound annual growth rate (CAGR).
Final comment
In a macro view, healthcare spending in the U.S. exceeds $2 trillion per year and we think the pharmaceutical spending will increase over the next several years given demographic patterns. Further, return on equity that significantly exceeds the industry average makes me feel bullish on this stock.
Hedge fund guru Jim Simons (Trades, Portfolio) added this stock to his portfolio in the third quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
