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. Investing News

    Latest Labor Numbers: Good News for the Market?

    Some economic numbers are indicating that the labor market is outperforming the stock market. Should investors be bullish?
  2. Investing News

    Stocks with Big Dividend Yields: 'It's a Trap!'

    Should you seek high yielding-dividend stocks in the current investment environment?
  3. Investing News

    Should You Be Betting with Buffett Right Now?

    Following Warren Buffett's stock picks has historically been a good strategy. Is considering his biggest holdings in 2016 a good idea?
  4. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  5. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  6. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  7. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  8. Investing

    Don't Freak Out Over Black Swans; Be Prepared

    Could 2016 be a big year for black swans? Who knows? Here's what black swans are, how they can devastate the unprepared, and how the prepared can emerge unscathed.
  9. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  10. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
RELATED FAQS
  1. When does a growth stock turn into a value opportunity?

    A growth stock turns into a value opportunity when it trades at a reasonable multiple of the company's earnings per share ... Read Full Answer >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. 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 >>
COMPANIES IN THIS ARTICLE
Trading Center