With a market capitalization of approximately $19.1 billion, AmerisourceBergen Corporation (ABC - Free Report) is expected to benefit from consistent solid organic revenue growth, World Courier Business, H.D. Smith acquisition and deal with Walgreens. However, sluggishness in the PharMEDium unit, declining dollar, generic inflation, cutthroat competition in the niche space and lower-than-expected contribution from generic launches are primary headwinds.
Which Way are the Estimates Treading?
For the current quarter, the Zacks Consensus Estimate for earnings is pegged at $1.44, reflecting growth of 8.3% on a year-over-year basis. The same for the revenues is pegged at $43.53 billion, reflecting an increase of 11.3% year over year.
For 2018, the Zacks Consensus Estimate for revenues is pegged at $168.05 billion, reflecting growth of 9.7%. The same for adjusted earnings for 2018 is pegged at $6.48, reflecting an increase of 10.2%.
The stock has a Zacks Rank #3 (Hold).
Here we take a quick look at the primary factors that have been plaguing AmerisourceBergen and henceforth discuss the prospects that ensure near-term recovery of the stock.
AmerisourceBergen Corporation Price and Consensus
What's Deterring AmerisourceBergen?
PharMEDium Slows down
AmerisourceBergen received a grand jury subpoena from the U.S. Attorney's Office for the Western District of Tennessee for documents related to the lab testing of a certain type of syringe made at its PharMEDium lab in Memphis. The lab is the company’s largest highly-automated production facility. As a result of the subpoena, the company suspended operations and recalled all of the products that had yet to expire. In fact, the FDA also visited this facility for the same reason. Sluggishness in this unit is likely to hamper the company’s specialty distribution segment in the long haul.
However, management expects production in the Memphis facility to resume and increase gradually over time as well as be fully operational in fiscal 2019.
In the third quarter of fiscal 2018, the segment's results were negatively impacted by PharMEDium, wherein the company had lower-than-expected revenues and profit contribution. Per management, because of the time and certain ongoing incremental expenses required to perform remedial measures, PharMEDium's contribution to adjusted EBIT and earnings in fiscal 2018 will be lower than anticipated.
Generic deflation has been higher than historic norms for several quarters for AmerisourceBergen, which is a headwind for the business. By the end of the third quarter of fiscal 2018, management confirmed that generic deflation rate has stabilized, but it's too early to factor an improvement into the company’s guidance.
The ABDC segment has been impacted by several factors, including accelerated deflation of generic drugs and a lower contribution from generic launches.
Due to the above factors, AmerisourceBergen underperformed its industry in a year's time. The company’s shares have returned 12.6% compared with industry's rise of 15%. The current level is lower than the S&P 500's return of 17.6%.
The company faces headwinds due to the slowdown in hepatitis C revenues and conversion of branded drugs to the lower price generics. Furthermore, a temporary slowdown in PharMEDium's growth is expected to mar the company’s bottom line.
Why Should You Still Hold?
World Courier Business Holds Ground
World Courier, a global leader in specialty logistics and a part of AmerisourceBergen, designs and executes world-class logistics processes. Per management, its position as the leader in global specialty logistics services drove volume growth and overall performance of the company.
Recently, the company announced its designation as the first logistics company to obtain global Good Distribution Practices certification or GDP, against three major GDP standards. Also, the company became the sole provider to hold a GDP certification with such wide and global scope.
The business delivered strong third quarter of fiscal 2018 results. At the end of the quarter, World Courier’s company-owned offices were located in more than 50 countries, with more than 14 investigational drug depots located in emerging markets worldwide. Solid volume growth and expanding operating margins have favored the World Courier unit in the quarter. The unit continues to deliver excellent results with records in the number of shipments handled and billable weight in the third quarter of fiscal 2018.
In the last two years, AmerisourceBergen invested nearly $1 billion in capital expenditures to create operational efficiencies, leverage scale and provide best-in-class customer service. Further, the recent U.S. tax legislation enhances the company’s ability to invest in business, innovate and deliver value to shareholders.
Over the long term, this enables the company to enhance the U.S. business. Recently, the company made strategic investments in IT systems, which positioned it to realize greater operational efficiency and increased operating leverage.
In fact, AmerisourceBergen also announced plans to roll out eight new IT systems and a new e-commerce platform at MWI. Per management, these systems will enable the company to run its business efficiently.
Want More from the MedTech Space?
A few better-ranked stocks in the MedTech space are Inogen Inc (INGN - Free Report) , Integer Holdings Corporation (ITGR - Free Report) and Patterson Companies, Inc. (PDCO - Free Report) . Inogen and Patterson Companies carry a Zacks Rank #2 (Buy). Integer sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Inogen has a long-term expected earnings growth rate of 22.5%, while the same for Integer Holdings and Patterson Companies is pinned at 15% and 8.3%, respectively.
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