AmerisourceBergen (NYSE:ABC) and two large rivals effectively control the market for distributing drugs from drug manufacturers to drug retailers, hospitals and similar locations where consumers go to fill their prescriptions. The industry has grown steadily for more than a decade now, but is showing little sign of slowing down.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

Recent Developments
At a healthcare conference earlier this year, Amerisource provided an overview of its business and expectations for growth. Industry growth has been solid, as the need to distribute drugs increases, along with an aging population. The expiration of patents on blockbuster drugs also favors the distribution players, as they are able to garner higher profit margins.

Over the past decade, this has roughly translated into 19% annual profit growth for Amerisource. It sees great potential for the coming decade, with demographics of older Americans supporting organic growth and the expansion of healthcare coverage overall, meaning more overall patients. Management sees closer links between the distributors and drug manufacturers over time, which it plans to combine with internal "cost containment efforts" to continue to grow profits in the double digits.

SEE: Healthcare Funds: Give Your Portfolio A Booster Shot

Outlook and Valuation
Amerisource has long-term financial goals to grow the top line at industry rates but leverage that into annual earnings above 15%. This is expected to come from cost cutting and distribution efficiencies, which management expects to translate into operating margin expansion over time. Free cash flow should continue to come in at about reported net income, and it plans to return at least 30% of free cash flow generated to shareholders. This will stem from dividend payouts and share buybacks.

For the full year, analysts currently project sales growth of 1.2%, total sales just over $81 billion, and earnings of $2.82 per share or annual growth of around 10%. This represents a forward earnings multiple of just below 13.

SEE: Investing In The Healthcare Sector

The Bottom Line
Amerisource's archrivals include McKesson (NYSE:MCK) and Cardinal Health (NYSE:CAH). All are currently trading at forward P/Es in the low double-digits. All three generally perform the same function of distributing drugs but differ somewhat in their geographic mix and clients served. Henry Schein (Nasdaq:HSIC) and Express Scripts (Nasdaq:ESRX) also serve as rivals.

SEE: Where Can Americans Go For Cheaper Healthcare

Express Scripts recently merged with Medco Health Solutions to form the largest pharmacy benefit management firm. Last year, Medco was Amerisource's largest customer at 19% of the top line. According to a company filing, its contract with Medco runs through March 2013, but appears to be stable as there are few alternative options out there. Overall, the industry has great growth prospects and the leading players are trading at very reasonable earnings valuations given the expansion expectations.

At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Fundamental Analysis

    5 Must-Have Metrics For Value Investors

    Focusing on certain fundamental metrics is the best way for value investors to cash in gains. Here are the most important metrics to know.
  2. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  3. Investing

    What Investors Need to Know About Returns in 2016

    Last year wasn’t a great one for investors seeking solid returns, so here are three things we believe all investors need to know about returns in 2016.
  4. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  5. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  6. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  7. Stock Analysis

    The Top 5 Micro Cap Alternative Energy Stocks for 2016 (AMSC, SLTD)

    Follow a cautious approach when purchasing micro-cap stocks in the alternative energy sector. Learn about five alternative energy micro-caps worth considering.
  8. Stock Analysis

    Analyzing Porter's Five Forces on Under Armour (UA)

    Learn about Under Armour and how it differentiates itself in the competitive athletic apparel industry in light of the Porter's Five Forces Model.
  9. Stock Analysis

    The Biggest Risks of Investing in Qualcomm Stock (QCOM, BRCM)

    Understand the long-term fundamental risks related to investing in Qualcomm stock, and how financial ratios also play into the investment consideration.
  10. Stock Analysis

    The Biggest Risks of Investing in Johnson & Johnson Stock (JNJ)

    Learn the largest risks to investing in Johnson & Johnson through fundamental analysis and other potential risks. Also discover how JNJ compares to its peers.
RELATED FAQS
  1. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  2. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  3. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  4. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
  5. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
  6. What is the formula for calculating earnings per share (EPS)?

    Earnings per share (EPS) is the portion of a company’s profit that is allocated to each outstanding share of common stock, ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center