|Shares Out. (in M):||238||P/E||14.2||13.3|
|Market Cap (in $M):||18,982||P/FCF||14.2||13.3|
|Net Debt (in $M):||2,542||EBIT||2,000||2,050|
I believe AmerisourceBergen (ABC) at current prices presents an attractive investment opportunity to buy a competitively advantaged company within a high quality, secularly growing industry at a cheap valuation.
ABC is one of the three largest wholesale distributors of brand, generic and specialty pharmaceuticals in North America. Over 80% of its earnings come from this business, which is the focus of this write-up.
On May 5, 2016, ABC revised its FY2016 guidance downward by 5% and estimated its FY2017 earnings would only grow 4% to 6%–below prior consensus estimates of double-digit growth. The reduced outlook stemmed primarily from lower-than-expected generic drug prices (went from a state of inflation to deflation), which was also one of the main culprits that caused MCK to cut its earnings guidance back in January. Since then, ABC’s stock price has declined and now sits close to a 52-week low, trading at ~13.4x consensus CY2017E EPS of ~$6.00.
Historically, the big three distributors (MCK, ABC and CAH) on average have traded at a slight premium to the S&P 500. Based on consensus estimates, they currently trade at an approximate 20% discount to the S&P 500. In fact, this is the largest discount these companies have traded at relative to the market since 2009.
Source: Avondale Partners “Industry Update: Pharmaceutical Distributors” dated April 18, 2016
The last four presidential election cycles (including the current one) have seen the pharmaceutical supply chain underperform the S&P 500 in the year prior to the election. Prior to this election cycle, the last three cycles saw these companies enjoy significant outperformance in the year after the election. Of course, past performance does not guarantee future results.