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Tickers in this Article: ABC, MCK, MRK, CVS, LPNT
AmerisourceBergen (NYSE:ABC) serves a vital role in the drug industry, as the middleman between drug manufacturers such as Merck (NYSE:MRK) and pharmacies, hospitals, and physician groups where consumers obtain their drugs. Its business operates on razor-thin margins, but is actually much more lucrative than it seems. IN PICTURES: How To Make Your First $1 Million

Fourth Quarter Results
Fourth quarter revenue improved 9%, to $18.7 billion on strong trends in generic drugs that management stated outperformed the overall market. It also cited "excellent performance by our higher-margin specialty distribution and services business," though, unlike rival McKesson (NYSE:MCK), does not break out these results individually in its press release. McKesson reported last week that its technology solutions segment grew in the low-single digits but reported an appealing 14.7% profit margin.

Expense controls boosted operating income 11% and led to a modest 2 basis point improvement in operating margins to 1.2%, demonstrating that the business is extremely low margin. However, earnings growth was strong, coming in at 22.2% to 44 cents per diluted share and 4 cents ahead of analyst projections.

Full Year Results
Full year operating revenue growth was more modest, rising 2.2% to $70.1 billion. Lower interest expense and overall margin expansion pushed operating income ahead 7%, to $883.7 million, while share buybacks and other items sent earnings up 17% to $1.69 per diluted share. Operating cash flow improved 6% to $783.8 million. Subtracting out capital expenditures of $145.8 million left free cash flow at just under $642 million, or $2.12 per share. (Learn more about free cash flow in Free Cash Flow Yield: The Best Fundamental Indicator.)

The Bottom Line
At a recent share price of $23.44, the price-to-free-cash-flow multiple is 11.1, illustrating that AmerisourceBergen's distribution model generates ample excess capital and the multiple the market is placing on it is quite reasonable. Management is currently calling for fiscal 2010 earnings between $1.82-1.92 per diluted share, for 8% to 14% year-over-year growth. Free cash flow trends should be similar, and tend to exceed reported net income each year.

During the earnings conference call, management estimated that drug industry growth will be in the mid-single digits over the next couple of years. It also sees healthcare reform "as part of the solution to controlling total healthcare expenditures, and anything that increases the number of prescriptions that are dispensed should be good for our industry and ABC." In other words, it should be "business as usual" for end customers, including CVS (NYSE:CVS) and LifePoint Hospitals (Nasdaq:LPNT), as it pertains to dispensing drugs. That means, AmerisourceBergen should continue to grow the top line modestly, and generate substantial cash flow for shareholders.

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