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Here's Why You Should Retain AmerisourceBergen (ABC) Stock

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AmerisourceBergen Corporation (ABC - Free Report) is well-poised for growth on the back of its robust U.S. Healthcare Solutions business and product launches. Intense competition remains a concern.

Shares of the Zacks Rank #3 (Hold) company have gained 24.6% against the industry’s decline of 5.6% in a year’s time. The S&P 500 Index has fallen 3.7% in the same time frame.

AmerisourceBergen — with a market capitalization of $30.77 billion — is one of the world’s largest pharmaceutical services companies, which is focused on providing drug distribution and related services to reduce health care costs and improve patient outcomes. It anticipates earnings to improve by 8.1% over the next five years. The company beat earnings estimates in three of the trailing four quarters and missed once, the average surprise being 4%.

What’s Driving Growth?

It is worth mentioning that AmerisourceBergen made a strategic evaluation of its reporting structure to represent its expanded international presence following the June 2021 buyout of Alliance Healthcare. Consequently, starting from the first quarter of fiscal 2022, the company has realigned its reporting structure under two reportable segments — U.S. Healthcare Solutions and International Healthcare Solutions.

Per the segment realignment, U.S. Healthcare Solutions consists of the legacy Pharmaceutical Distribution Services reportable segment (excluding Profarma), MWI Animal Health, Xcenda, Lash Group and ICS 3PL. The segment benefits from increasing volume and an expanding customer base. Strong organic growth rates in the U.S. pharmaceutical market, improving patient access to medical care, enhanced economic conditions and population demographics are likely to favor the segment in the quarters to come.

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In fiscal second-quarter 2022, revenues at this segment totaled $50.94 billion, reflecting a rise of 5.8% on a year-over-year basis on the back of an increase in specialty product sales and overall market growth. Lower revenues from commercial COVID-19 treatments partially offset the upside. Segmental operating income was $729.5 million, up 11.4% year over year. Higher gross profit (which included fees earned associated with the distribution of government-owned COVID-19 treatments and gross profit on sales to specialty physician practices) contributed to the upside.

In April 2022, AmerisourceBergen introduced AB Health Ventures — a dedicated corporate venture capital fund — focused on investing in and collaborating with emerging healthcare startup companies that are involved in transforming healthcare for people and animals worldwide. This venture capital fund will build on AmerisourceBergen’s continued commitment to offering innovation to its customers. It is worth mentioning that AB Health Ventures is a wholly-owned subsidiary of AmerisourceBergen that will utilize the company’s depth of expertise, global presence, and solid relationships with stakeholders throughout the pharmaceutical supply chain to boost value for entrepreneurs who are searching for partners to aid in business growth.

In January 2022, the company collaborated with TrakCel— the leading innovator of cellular orchestration solutions — to launch an integrated technology platform developed to accelerate patient access to prescribed cell and gene therapies and provide complete visibility throughout the treatment journey.

What’s Hurting the Stock?

AmerisourceBergen operates in a highly competitive pharmaceutical distribution and related health care services market. The generic industry is facing consolidation of customers and manufacturers, globalization and increasing quality and regulatory challenges. The company encounters additional competition from manufacturers, chain drugstores, specialty distributors, and packaging and health care technology companies. Increased competition will impact the company’s business.

Estimate Trend

AmerisourceBergen has been witnessing an upward estimate revision trend for fiscal 2022. In the past 60 days, the Zacks Consensus Estimate for its earnings has moved north by 1.5% to $10.95.

The Zacks Consensus Estimate for third-quarter fiscal 2022 revenues is pegged at $58.82 billion, suggesting growth of 10.1% from the year-ago reported number.

Stocks to Consider

Some better-ranked stocks in the broader medical space are AMN Healthcare Services, Inc. (AMN - Free Report) , Masimo Corporation (MASI - Free Report) and Patterson Companies, Inc. (PDCO - Free Report) .

AMN Healthcare surpassed earnings estimates in each of the trailing four quarters, the average surprise being 15.6%. The company currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

AMN Healthcare’s long-term earnings growth rate is estimated at 1.1%. The company’s earnings yield of 11.4% compares favorably with the industry’s (0.8%).

Masimo beat earnings estimates in each of the trailing four quarters, the average surprise being 4.4%. The company currently carries a Zacks Rank #2 (Buy).

Masimo’s estimated earnings growth rate for second-quarter 2022 is pegged at 22.3%. The company’s earnings yield is 3.8% against the industry’s (8.5%).

Patterson Companies surpassed earnings estimates in three of the trailing four quarters and missed once, the average surprise being 2.7%. The company currently carries a Zacks Rank #2.

Patterson Companies’ long-term earnings growth rate is estimated at 9.9%. The company’s earnings yield of 7.1% compares favorably with the industry’s 4.2%.