Growth Stocks With Less Risk: The Drug Dealer

Pharmaceuticals distributor AmerisourceBergen (ABC), with its massive moat, healthy share repurchases and big cash flow, has a good reputation as a long-term value investment. But these days, investors are turning to this $14.8 billion market cap company to fulfill another part of the diversified portfolio: growth.

ABC Chart

ABC data by YCharts

AmerisourceBergen was one of 39 companies that popped up when we set the YCharts Stock Screener to find growing companies with features that reduce the risks typical of growth stocks. These “Sane Growth” stocks combine modest share prices and strong fundamentals with recent revenue and profit gains in double digits.

We further screened to define our Sane Growth Stocks and settled on five: Dollar General (DG), AmerisourceBergen, Clean Harbors (CLH), Eastman Chemical (EMN) and Wellcare Health Plans (WCG). We covered Dollar General in the initial article and will follow up with the others.

AmerisourceBergen and its two competitors, McKesson (MCK) and Cardinal Health (CAH) distribute more than 90% of prescription drugs in the U.S. They act as middlemen between drug manufacturers and the end distributors, like pharmacies, hospitals and doctors, for both brand name and generic drugs. Their masses allow them to negotiate prices that small players would never get, making new competition in the business unlikely.

(Read more articles about companies with competitive moats.)

ABC Revenue TTM Chart

ABC Revenue TTM data by YCharts

On Sept. 1, AmerisourceBergen became the distributor for drug store Walgreen’s (WAG), taking away the contract from Cardinal Health. It was a behemoth deal – worth $400 billion over 10 years -- that gave Walgreens some equity in the distributor and AmerisourceBergen more bargaining power in negotiations with drug companies. Moreover, it gave AmerisourceBergen the chance to quickly expand. With its European partner, Alliance Boots, Walgreens gets AmerisourceBergen into 11,000 stores in 21 countries.

Analysts now estimate that AmerisourceBergen’s revenues will grow 10% in the current year and a whopping 30% in 2014. Earnings are expected to be up 24% from last year to the end of 2014.

Watch the profit margins for signs of weakness in this investment thesis. They were down last quarter and are expected to decline further this year while it implements the Walgreens contract. However, the bullish forecasts for the company rely on margin improvement towards the end of fiscal 2014, which ends September 30, 2014.

ABC Operating Margin TTM Chart

ABC Operating Margin TTM data by YCharts

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.

ABC

Read more articles about: Company Analysis  growth stocks   moats   

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