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AmerisourceBergen Corp. (ABC - Analyst Report) posted earnings (excluding employee severance, LIFO expense, warrants, litigation, restructuring and acquisition costs) of $1.06 per share in the second quarter of fiscal 2014 (ended Mar  31, 2014), beating the Zacks Consensus Estimate of $1.00 and above the year-ago figure of 89 cents per share.

However, earnings plunged 12.6% on a reported basis due to expenses related to issuance of warrants to Walgreens (WAG - Analyst Report) and Alliance Boots and employee severance, litigation and other expenses.

Revenues grew 38.6% to $28.5 billion in the second quarter of fiscal 2014. The reported revenues surpassed the Zacks Consensus Estimate of $28.2 billion.

Fiscal Second Quarter in Detail

The company reports results of the AmerisourceBergen Drug Corp. (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 $27.9 billion during the fiscal second quarter. Within this segment, revenues from the ABDC business increased 46.0% primarily due to the on-boarding of the new branded pharmaceuticals business from Walgreens and a portion of their generic pharmaceuticals business along with increased branded pharmaceutical sales to other large customers.

The ABSG unit also performed well during the quarter with revenues increasing 10%. 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 $572.5 million, up 11.0% y/y.

Gross profit (adjusted) for the quarter increased 16.6% to $831.6 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 16.1% to $415.0 million due to the on-boarding of the contract with Walgreens and Alliance Boots.

2014 Guidance Increased

AmerisourceBergen now expects earnings from continuing operations in the range of $3.64 – $3.74 in fiscal 2014, up from the earlier estimate of $3.60–$3.73 and an increase of 13.0% – 17.0% from fiscal 2013. The pre-earnings Zacks Consensus Estimate of $3.70 per share is well within the guidance.

AmerisourceBergen continues to expect revenues to grow in the range of 30.0%–34.0%. 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 second quarter beat and subsequent increase in annual earnings 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 Walgreens and access to generic drugs and related pharmaceutical products through the Walgreens & Alliance Boots Development joint venture. We believe the distribution deal with Walgreens will positively impact results in fiscal 2014.

AmerisourceBergen currently carries a Zacks Rank #2 (Buy).  Other stocks that look equally attractive in the same sector include Cardinal Health (CAH - Analyst Report) and McKesson Corp. (MCK - Analyst Report), both carrying a Zacks Rank #2.

Read the Full Research Report on ABC
Read the Full Research Report on CAH
Read the Full Research Report on MCK
Read the Full Research Report on WAG


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