AmerisourceBergen Corporation ABC is well poised for growth on the back of its robust pharmaceutical distribution business and new product offerings. However, intense competition continues to mar prospects.
The stock has gained 12.2%, against the industry’s decline of 6.6% in a year’s time. Meanwhile, the S&P 500 Index rallied 12% in the same time frame.
AmerisourceBergen — with a market capitalization of $19.21 billion — is one of the world’s largest pharmaceutical services companies, which focuses on providing drug distribution and related services to reduce health care costs and improve patient outcomes. It anticipates earnings to improve 7.5% over the next five years. Also, the company beat estimates in each of the trailing four quarters, the average surprise being 7.4%.
Let’s take a closer look at the factors that substantiate the company’s Zacks Rank #3 (Hold).
Factor Hurting the Stock
AmerisourceBergen operates in a highly competitive pharmaceutical distribution and related health care services market. The company’s primary competitors include Cardinal Health, McKesson and national generic distributors and regional distributors. The company faces additional competition from manufacturers, chain drugstores, specialty distributors and packaging and health care technology companies. Consequently, stiff competition remains a concern.
Pharmaceutical Distribution serves healthcare providers in the pharmaceutical supply channel. AmerisourceBergen has been witnessing strong revenue growth in this unit in the last couple of quarters. Increasing volume and an expanding customer base have been driving the segment. Strong organic growth rates in the U.S. pharmaceutical market, improving patient access to medical care, improved economic conditions and population demographics are likely to continue benefiting the segment in the quarters to come.
In fiscal third-quarter 2020, revenues at this segment were $43.58 billion, reflecting an improvement of 0.1% on a year-over-year basis. Owing to the onset of the COVID-19 pandemic, many of the company’s customers ramped up their purchases in first-quarter 2020 that led to fewer purchases in the second quarter. This led to marginal improvement in the segment’s revenues. Segmental operating income was $426.6 million, up 3.6% year over year. Increase in gross profit and decrease in operating expenses drove the upside.
AmerisourceBergen is expected to benefit from generics growth in the long run. The company is well-positioned to help ensure products get to market as efficiently as possible. During the fiscal third quarter, AmerisourceBergen introduced two new offerings at its MWI Animal Health business, which have been developed to help veterinarians manage the financial impact of COVID-19.
The new offerings enable practices to offer flexible financing solutions for clients, thereby lowering the financial burden of both routine and emergency pet care. The offerings also aid practices in achieving sustained revenue, long-term client engagement and improved patient outcomes.
Which Way are Estimates Headed?
For fiscal 2020, the Zacks Consensus Estimate for revenues is pegged at $188.57 billion, indicating an improvement of 5% from the prior-year quarter. The same for adjusted earnings per share stands at $7.87, suggesting growth of 11%.
Stocks to Consider
Some better-ranked stocks from the broader medical space include West Pharmaceutical Services, Inc. WST, Thermo Fisher Scientific Inc. TMO and PerkinElmer, Inc. PKI. While PerkinElmer sports a Zacks Rank of 1 (Strong Buy), both Thermo Fisher and West Pharmaceuticals carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
PerkinElmer has a projected long-term earnings growth rate of 17.4%.
West Pharmaceutical has a projected long-term earnings growth rate of 17.4%.
Thermo Fisher has an estimated long-term earnings growth rate of 15%.
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