Long AmerisourceBergan (ABC, $85-90, Mkt Cap: $20.0B)
ABC Investment Summary: We believe that ABC's revenues are accelerating and margins may rebound back to historical levels driving a re-valuation from trough to normalized valuation levels. Beginning in calendar year 2018, ABC is poised to bring on drug volumes and revenues of as much as $14-15B from the Walgreen's (WBA) partnership with Prime Therapeutics (4th largest PBM) and the WBA-Rite-Aid (RAD) deal. Margins are at trough levels from investments in DCs (distribution centers) to manage the new business. We expect margins to begin to normalize as the new business rolls on in 2H18-2019.
Risk to Monitor: Above normal generic deflation/retail Rx pressure are key fundamental risks to our thesis as these may hinder margin expansion or delay the thesis. Also, recent pressures in the Other segment (PharMEDium FDA hold, LASH execution) are execution issued that surfaced in FY18 that will be monitored and could delay our thesis. Headline risks around the Trump Blueprint, bio-pharma pricing, and the potential for shifting pricing benchmarks have also kept investors out of the drug distributors.
Key Metrics to Monitor Each Quarter:
Revenue Growth in-line or better than consensus
Margin expansion towards normalized levels after revenue growth acceleration. FY19-20 Pre-tax margins increase and close the gap to prior levels of 1.25-1.35% vs. consensus expectations of flat margins
EPS growth in-line or better than consensus (our estimates for earnings power are materially above cons)
Strategic Metrics to monitor:
Stable Generic deflation commentary: currently in HSD range
Stable Branded price inflation commentary: +6-8%
PharMEDium re-opens, volumes ramp, FDA issues resolved
Lash Group execution issues on new ERP get resolved