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Reasons to Retain AmerisourceBergen (ABC) in Your Portfolio

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AmerisourceBergen Corporation is well-poised for growth on the back of robust U.S. Healthcare Solutions business and product launches. However, intense competition is a concern.

Shares of this currently Zacks Rank #3 (Hold) company have gained 1.1% against the industry’s 3.8% decline in the past year. The S&P 500 Index has decreased 7.4% in the same time frame.

AmerisourceBergen is one of the world’s largest pharmaceutical services companies, focused on providing drug distribution and related services to reduce healthcare costs and improve patient outcomes. It has a market capitalization of $33.85 billion.

The company’s earnings are anticipated to improve 8.7% over the next five years. Its earnings beat estimates in each of the trailing four quarters, the average surprise being 3.47%.

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What’s Driving Growth?

Following the buyout of Alliance Healthcare in 2021, ABC made a strategic evaluation of its reporting structure to represent its expanded international presence. In fiscal 2022, the company realigned its reporting structure under two segments — U.S. Healthcare Solutions and International Healthcare Solutions.

Following this rearrangement, U.S. Healthcare Solutions consists of the legacy Pharmaceutical Distribution Services reportable segment (excluding Proforma), 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 coming quarters.

In the fiscal first quarter of 2023, revenues at this segment were $56.2 billion, indicating an increase of 6.1% year over year. This improvement was due to higher specialty product sales and overall market growth. However, this upside was partially offset by lower revenues from commercial COVID-19 treatments. Segmental operating income was $572.4 million, up 0.6% year over year.

Higher gross profit (which included fees earned from the distribution of government-owned COVID-19 treatments and a gross profit on sales from specialty physician practices) contributed to the upside. Revenues are expected to grow 6-8%, with respect to the U.S. Healthcare Solutions segment. Operating income at this segment is anticipated to grow 1-4%.

In September 2022, AmerisourceBergen signed a definitive agreement to acquire Germany-based PharmaLex Holding GmbH for €1.28 billion ($1.3 billion) in cash.

PharmaLex is a leading provider of specialized services for the life sciences industry, owned by funds advised by AUCTUS Capital Partners AG. It has a significant footprint in Europe and the United States, and a growing presence in other parts of the world.

The acquisition of this Germany-based company will enhance ABC’s global portfolio of solutions to support manufacturer partners across the pharmaceutical development and commercialization journey.

Last year, ABC collaborated with TrakCel, the leading innovator of cellular orchestration solutions, to launch an integrated technology platform. The idea was to accelerate patient access to prescribed cell and gene therapies, and provide complete visibility throughout the treatment process.

The acquisition of Alliance Healthcare strongly drove AmerisourceBergen’s international segment revenues in fiscal 2022.

Adjusted EPS for fiscal 2023 is estimated between $11.50 and $11.75, implying a 4-7% increase from the previous year. ABC estimates revenue growth of 5-7% for the same time frame.

What’s Hurting the Stock?

AmerisourceBergen operates in a highly competitive pharmaceutical distribution and related healthcare services market. The generic industry is facing consolidation of customers and manufacturers, global competitors and regulatory challenges.

The company encounters additional competition from manufacturers, chain drugstores, specialty distributors, and packaging and healthcare technology companies. Increased competition is likely to affect its business.

Estimate Trend

AmerisourceBergen has been witnessing a stable estimate revision trend for fiscal 2023. In the past 30 days, the Zacks Consensus Estimate for earnings has remained stable at $11.61 per share.

The consensus estimate for second-quarter fiscal 2023 revenues is pegged at $60.81 billion, indicating a 5.4% increase from the year-ago quarter. The bottom-line estimate is pegged at $3.27, implying a 1.6% year-over-year improvement.

Stocks to Consider

Some better-ranked stocks from the broader medical space are Becton, Dickinson and Company (BDX - Free Report) , Henry Schein (HSIC - Free Report) and The Cooper Companies (COO - Free Report) .

Becton, Dickinson and Company has an estimated long-term growth of 7.8%. BDX’s earnings surpassed estimates in each of the trailing four quarters, the average surprise being 6.47%.  Currently, BDX carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The company’s shares have gained 0.8% compared with the industry’s 5.9% growth in the past three months.

Henry Schein, sporting a Zacks Rank #1 at present, has an estimated long-term growth of 8.1%. HSIC’s earnings surpassed estimates in three of the trailing four quarters and met the same once, the average surprise being 2.97%.

The company’s shares have gained 2.6% compared with the industry’s 5.9% growth in the past three months.

The Cooper Companies, carrying a Zacks Rank #2 at present, has an estimated long-term growth of 11%. COO’s earnings missed estimates in three of the trailing four quarters and beat the same once, the average negative surprise being 1.82%.

The company’s shares have gained 10.1% compared with the industry’s 5.9% growth over the past three months.

See More Zacks Research for These Tickers

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