Drug distribution firm AmerisourceBergen (NYSE:ABC) reported fourth-quarter and fiscal year-end results on Tuesday that saw profits beat analyst projections. Sales are also growing briskly and expected to continue to do so given a number of favorable industry tailwinds. At the current valuation, the stock is a worthy investment candidate for investor portfolios.
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Fourth Quarter Review
Revenues improved 5.3% to $19.7 billion. Sales grew 6% at the flagship distribution operations as business from its largest customers, which include Medco Health (NYSE:MHS), grew faster than the market. Its specialty group, which helps pharma and biotech companies bring drugs to market, experienced 4.2% top-line growth.

Gross profits grew 10.1%, as strong sales, especially of generic drugs that includes manufacturers such as Teva Pharmaceutical (Nasdaq:TEVA) and Dr. Reddy's Labs (NYSE:RDY), boosted profitability. Operating expenses grew faster than sales, but the company was still able to increase operating income by 10.5% to $248.2 million. Higher interest expenses tempered the bottom-line increase as net income grew 8.5% to $141.2 million, but share buybacks pushed diluted earnings ahead by 13.6% to 50 cents per diluted share.

Full-Year Recap
Full-year sales growth was even stronger and increased 8.6% to $78 billion. This was again attributed to generics as well as specialty group trends. AmerisourceBergen again saw gross profit improvements and sales leverage as it held costs in check. Diluted earnings improved 31.4% to $2.22 per share, though this included about a nickel of one-time gains. Cash flow also improved markedly. Operating cash flow exceeded $1.1 billion while free cash flow came in at $924 million, or approximately $3.21 per diluted share. (For related reading, see Free Cash Flow Yield: The Best Fundamental Indicator.)

Outlook
For the coming year, management projects sales growth between 2% and 4%, and earnings in a range of $2.31 and $2.41 per diluted share for year-over-year growth of 7% to 12%. Free cash flow is expected to come in between $625 million and $700 million, or about $2.17 to $2.43 per share, based on current diluted shares outstanding.

Bottom Line
Fourth-quarter profits came in ahead of analyst projections and the forward outlook demonstrates that AmerisourceBergen is growing steadily. Going forward, the company sees an aging population, shift to higher-margin generic drugs and healthcare legislation that will add millions of new patients into the healthcare system, as key industry drivers.

An increased focus on driving more efficiencies into the system also bodes well for AmerisourceBergen and archrivals, including McKesson Corp. (NYSE:MCK). Both trade at forward P/E multiples below 14, based on current guidance and analyst expectations. This represents a reasonable entry point for both companies, though AmerisourceBergen can likely grow faster given its projected sales for the coming year will be only about 70% of McKesson's projected top line.

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Tickers in this Article: ABC, MCK, MHS, TEVA, RDY

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