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AmerisourceBergen Corp. (ABC - Analyst Report) posted earnings (excluding employee severance, LIFO expense, warrants, litigation, restructuring and acquisition costs) of 80 cents per share in the first quarter of fiscal 2014 (ended Dec  31, 2013), beating the Zacks Consensus Estimate by a penny and the year-ago figure of 73 cents per share.

However, earnings plunged 71.6% on a reported basis due to expenses related to issuance of warrants to Walgreens (WAG - Analyst Report) and Alliance Boots.

Revenues grew 38.5% to $29.2 billion in the first quarter of fiscal 2014. The reported revenues surpassed the Zacks Consensus Estimate of $27.3 billion.

Fiscal First Quarter in Detail

Following the acquisition of the World Courier Group in 2012, AmerisourceBergen made some adjustments in its reporting format. The company decided to report results of the AmerisourceBergen Drug Corporation (ABDC) and AmerisourceBergen Specialty Group (ABSG) units under the Pharmaceutical Distribution segment. Results of the World Courier Group and AmerisourceBergen Consulting Services (ABCS) have been clubbed under “Other."

Revenues from the Pharmaceutical Distribution segment surged 39.0% to $28.6 billion during the fiscal first quarter. Within this segment, revenues from the ABDC business increased 46.0% primarily due to the on-boarding of the new distribution agreement with Walgreens and increased sales to a large pharmacy benefit management customer.

The ABSG unit also performed well during the quarter with revenues increasing 8%. Results of the segment were driven by solid performance in third party logistics, blood products, vaccine and physician office distribution business.

Revenues from the Other segment were $604.1 million, up 20.0% y/y.

Gross profit (adjusted) for the quarter increased 11.6% to $724.8 million. Gross profit benefited from increased revenue growth and strong performance in generic pharmaceuticals in the ABDC segment.

Operating expenses (adjusted) during the quarter grew 13.8% to $402.1 million due to the on-boarding of the contract with Walgreens and Alliance Boots.

2014 Guidance Updated

AmerisourceBergen continues to expect earnings from continuing operations in the range of $3.60 – $3.73 in fiscal 2014, up 12.0% – 16.0% from 2013. The pre-earnings Zacks Consensus Estimate of $3.69 per share is well within the guidance. AmerisourceBergen now expects revenues to grow in the range of 30.0% – 34.0%, up from the earlier expectations of 28% – 31%. Operating margins, however, is expected to decline by 20-23 basis points due to the on boarding of significant new lower margin business.

Our Take

We are encouraged by the first quarter beat and increase in fiscal 2014 revenue guidance. We remind investors that AmerisourceBergen has entered into a strategic agreement with Walgreen and Alliance Boots GmbH in fiscal 2013.

The agreement includes a ten-year pharmaceutical distribution contract with Walgreen and access to generic drugs and related pharmaceutical products through the Walgreens Boots Alliance Development joint venture. We believe the distribution deal with Walgreens will positively impact results in fiscal 2014.

Shares were up in pre-market trading. AmerisourceBergen currently carries a Zacks Rank #3 (Hold).  Some better-ranked stocks in the same sector include Cardinal Health (CAH - Analyst Report) and Align Technology Inc. (ALGN - Analyst Report). Both carry a Zacks Rank #1 (Strong Buy).

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