We maintain our Neutral recommendation on AmerisourceBergen Corporation (ABC) following the company’s first quarter fiscal 2011 performance. The reported quarter’s earnings of 57 cents beat the Zacks Consensus Estimate by 4 cents and was 9.6% above the year-ago earnings.
Although revenues of $19.9 billion came in line with the Zacks Consensus Estimate, they increased 2.9% from the year-ago period. The increase was the result of a 4.8% climb in AmerisourceBergen Drug Corporation (ABDC) revenues, partly offset by a 3.8% dip in AmerisourceBergen Specialty Group (ABSG) revenues.
Based on first quarter results, we have increased our fiscal 2011 earnings estimate by 3 cents to $2.41, which is at the high end of the company’s guidance range of $2.31-$2.41. AmerisourceBergen expects revenue to grow 2% – 4% in fiscal 2011, and plans to spend about $400 million on share repurchases.
Over the last several years, AmerisourceBergen has been benefiting from pharmaceutical industry growth in the US. We believe that the company should continue to benefit from industry growth, which is driven by several factors like an aging population, increased use of generics, introduction of new treatments, increased use of drug therapies and favorable legislative developments.
Further, AmerisourceBergen’s generics business continues to perform well with the company benefiting from the rapid growth of generic pharmaceuticals in the US market. With several branded products scheduled to lose exclusivity in the coming years, we expect AmerisourceBergen’s generics business to continue witnessing growth in the coming years. Moreover, the introduction of a legislative pathway for biosimilars would be a major positive for the company.
The company has been pretty active on the acquisition front in order to supplement organic growth, spending more than $1 billion on acquisitions in the last eight years. Going forward, we believe AmerisourceBergen will continue to pursue acquisitions, which will help drive growth. The company exited first quarter of 2011 with a cash balance of about $1.4 billion and plans to spend around $200 $300 million in fiscal 2011 on the acquisition of pharmaceutical, distribution or related services business.
However, AmerisourceBergen operates in the highly competitive pharmaceutical distribution market. The company’s primary competitors include Cardinal Health Inc. (CAH), McKesson Corporation (MCK) as well as national generic distributors and regional distributors.
Additionally, in recent years, the healthcare industry has been witnessing increasing consolidation. If this trend continues among AmerisourceBergen’s customers and suppliers, it could increase the bargaining power of resulting entities, which may lead to greater pressure to reduce prices for products and services. This will have a negative impact on the company’s top-line.
AMERISOURCEBRGN (ABC): Free Stock Analysis Report
CARDINAL HEALTH (CAH): Free Stock Analysis Report
MCKESSON CORP (MCK): Free Stock Analysis Report
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