AmerisourceBergen: A Steady Wealth…

Investment management. Portfolio diversification.

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AmerisourceBergen (ABC) has performed well since my last bullish take on it in early November, posting an 8% total return since then, far outpacing the negative 2.4% return of the S&P 500 (SPY) over the same timeframe.

While some may regard ABC’s core business as being boring, there’s nothing boring about the wealth that it’s generated for shareholders over the long run. In this article, I focus on why ABC is a worthy buy at present for potentially strong long-term returns.

ABC: A Steady Wealth Compounder You’ll Want To Own

AmerisourceBergen is one of the 3 largest drug and medical products distributors in the world, sitting behind McKesson (MCK) and ahead of Cardinal Health (CAH). These three companies form a virtual oligopoly, with a combined 90% share of the U.S. drug distribution market.

Like its peers, ABC serves as an essential link between drug manufacturers and their end markets, including pharmacies, health systems, and healthcare providers. This centralized distribution model reduces complexities, as it eliminates the need for thousands of SKUs to be shipped individually.

ABC also enjoys an economy of scale, as this distribution model requires substantial upfront capex and is generally low margin, which serve as a deterrent to new entrants. This, combined with ABC’s reliable growth, has resulted in a strong track record of shareholder returns. As shown below, ABC stock has returned 301% over the past decade, nearly matching the 319% return of the S&P 500.

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ABC Total Return (Seeking Alpha)

At the same time, ABC stock provides less volatility. This is reflected by its low beta score, implying lower than average market volatility. As shown below, ABC’s beta has hovered in the 0 to 0.8 range since the start of the pandemic in early 2020.

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ABC Beta (YCharts)

ABC continues its strong growth with its latest fiscal Q1’22 results (ended December 2021), with revenue growing by an impressive 13.5% YoY, to $59.6B. This was primarily driven by a 604% increase in revenue within its International Healthcare Solutions segment with the June 2021 acquisition of Alliance Healthcare from Walgreens (WBA), and by a 2.7% increase in the U.S. healthcare solutions segment.

Also encouraging, operating margin improved to 1.08%, up 4 bps from 1.04% in the prior year period. The drug distribution space is notorious for having low margins, and this is a meaningful uptick, driven by higher margins in the Alliance Healthcare business acquired from Walgreens last year. Management sees continued growth and synergies ahead, as it raised its adjusted EPS guidance for 2022 to $10.75 at the midpoint, up from $10.65 previously.

Looking ahead, CFRA expects ABC to grow operating earnings at least in the mid-single digits over the long term, driven by aging baby boomers, rapid biologic drug development, and strong pet ownership trends, as these tailwinds drive demand growth for conventional and specialty drugs, as well as veterinarian distribution services.

In addition, while McKesson has taken ownership of the U.S. COVID vaccine distribution, ABC has catalysts stemming from oral COVID treatment distribution as well as vaccine distribution outside of the U.S., as noted during the recent conference call:

The newly authorized oral COVID treatments are a milestone in the efforts to curb the impact of the virus, and we are supporting their distribution to sites of care across the U.S. Our robust public-private partnerships with pharma manufacturers and the U.S. government demonstrate the value of AmerisourceBergen’s intellectual confidence as we have utilized our commercial strength and ability to collaborate effectively to quickly create solutions in the health care system.

Outside the U.S., AmerisourceBergen’s network of global businesses Alliance Healthcare, World Courier and Innomar in Canada are playing a pivotal role in supporting the COVID-19 vaccination efforts across 30-plus countries. The collective distribution support spans four continents and includes a wide range of services from third-party logistics to temperature-controlled packaging, storage and transport.

Alliance Healthcare continues to deliver strong results while supporting the COVID-19 response in multiple countries from vaccination to testing, including in the UK, where the team is supporting the distribution of vaccines and serving as the sole distributor of the rapid lateral flow COVID-19 testing kits to pharmacies.

Meanwhile ABC maintains a strong BBB+ rated balance sheet with a net debt to EBITDA well under 2x. While its 1.4% dividend yield is rather low, it comes with a low 19% payout ratio, 17 years of consecutive growth, and a 5% 5-year dividend CAGR. ABC should also be regarded as a total return story as its retired 22.5% of its outstanding share count over the past decade, as seen below.

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ABC Shares Outstanding (Seeking Alpha)

Risks to ABC include increased competitive pressures from its 2 large peers, which may pressure margins. In addition, political pressures on specialty drug pricing and reimbursement pressures on pharmacy and healthcare providers may lead to cost reduction measure that affect profitability for drug wholesalers such as ABC.

Considering all the above, I see value in ABC at the current price of $136 with a forward PE of 12.65 (based on the midpoint of management’s FY 2022 guidance). This sets comfortably below ABC’s normal PE of 15.06 over the past decade. Sell side analysts have a consensus Buy rating on ABC with an average price target of $150.54, implying a potential one-year 12% total return including dividends.

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ABC Valuation (FAST Graphs)

Investor Takeaway

AmerisourceBergen has a moat-worthy business model with strong underlying fundamentals. It’s posting revenue and margin growth, and management just raised its EPS guidance for the fiscal year 2022. Looking forward, ABC is well-positioned to fulfill demand for COVID treatments in the U.S. and vaccines in Europe. I see value in ABC at present for steady long-term growth.


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