Summary
- AmerisourceBergen is a well-managed and well-run company.
- The stock has at least 20% upside left in the near term.
- The stock represents both value and growth, and for the long term, this is a solid stock to own.
AmerisourceBergen Corporation (ABC) is trading at an attractive valuation with at least 20% upside left in the near term, per my estimate. It belongs to the human and animal healthcare distribution space. It is a global pharmaceutical sourcing and distribution services company. It operates in the U.S. and select global markets.
The company has two reportable segments, which are Pharmaceutical Distribution Services segment and Other. Pharmaceutical Distribution Services segment's operations provide strategic global sourcing and drug distribution. The Other segment's operations provide global commercialization services through AmerisourceBergen Consulting Services ("ABCS"). In addition, Other includes World Courier, which is a global transportation and logistics provider for the healthcare industry. Other also includes MWI, a leading animal healthcare distribution company in the U.S. and the U.K.
I believe the company has a prudently aggressive management team led by Steven H. Collis. Under the management team, ABC has generated excellent ROEs, ROICs, and cash flows in the past few years. To enhance the efficiency of its distribution platform, the company has invested more than $1 billion in its distribution infrastructure in the past 10 years. And the company has successfully built a solid distribution platform and a strong supply chain. It has also built 27 strategically located distribution centers across the U.S.
Growth Opportunities
Although healthcare distribution is a low growth business, ABC has several growth opportunities. These are described below:
- ABC distributes its products to 95% of U.S. hospitals and 34% of U.S. retail pharmacies. The company has covered only 34% of U.S. retail pharmacies and has huge potential to grow its reach here.
- Internationally, ABC has operations in select markets and it has significant room to expand its operations internationally.
- The company's Good Neighbor Pharmacy program helps independent community pharmacies compete more effectively in a highly competitive market. As a result, the company's reach to new pharmacies is growing.
- The company's Elevate Provider Network, a managed care network, connects its retail pharmacy customers to payer plans throughout the U.S. This is also helping grow its pharmacy customers.
Inorganic Growth Story
ABC has always remained a modestly acquisitive company. Through strategic acquisitions, the company has achieved immense financial success. In fiscal 2018, ABC struck two deals which will boost its revenue growth.
ABC acquired Northeast Veterinary Supply Company ("NEVSCO"), which was a regional distributor of veterinary drugs. NEVSCO primarily operates in the northeast region of the U.S. The acquisition will complement MWI's position in veterinary drugs distribution. There is scope that ABC will expand NEVSCO's operations across the U.S. and the U.K.
As mentioned above, ABC completed another deal in the same year. It acquired H.D. Smith Holding Company ("H.D. Smith"), which was the largest drug wholesaler in the U.S. The distribution items of H.D. Smith include brand, generic, and specialty drugs. I believe the acquisition of H.D. Smith will result in meaningful synergies including cost synergies at ABC. It will further strengthen ABC's supply chain.
Xcenda, a part of AmerisourceBergen, announced in May this year the acquisition of Dymaxium, which is a market access company that has developed its FormularyDecisions.com platform. Xcenda is a value-driven managed service provider in the fields of market research and product launch among many others. Xcenda is like a consultancy firm operating in the pharmaceutical space. For ABC, Xcenda offers value-added services to ABC's customers and indirectly boosts revenue growth. Dymaxium's FormularyDecisions.com platform is aimed at payers. It provides them access to clinical evidence and product information, which are critical to their decision-making process.
