EUR 850.00 For Business Accounts Only

Morningstar | Amerisource Reports a Mixed Quarter, but the Operating Environment Remains Steady

Amerisource reported a mixed quarter, but the main takeaway is a continued stabilization for its core drug distribution operations. In fact, its specialty distribution operations seem to be hitting on all cylinders. Amerisource is the largest specialty distributor in the U.S., and we believe solid results for this segment are a major positive. Pricing volatility for its core pharmaceutical distribution business remained stable, which is a positive sign. In addition, management mentioned it has been able to smoothly finish the integration of Rite Aid. We believe recent infrastructure investments have begun to payoff and have contributed to greater distribution efficiency. We find these developments encouraging, and we are reiterating our $106 fair value estimate and wide moat rating. Amerisource also recently acquired HD Smith (a large regional pharmaceutical distributor) earlier this year and the integration process of those assets and corresponding client book have added materially to results. We believe this was a solid operating move as it should add to the firm’s top-tier distribution assets, grow its client book, and enhance its wide economic moat.

As was the case last quarter, there were some material headwinds from Amerisource’s non-drug wholesaling businesses. In particular there was a continuation of major headwinds related to the firm’s drug compounding manufacturer as a key facility was closed given manufacturing concerns raised during a recent FDA inspection. The cost to bring these facilities up to par has been a major drag on results, and the firm is uncertain when it will be able to bring these assets back online. Accordingly, management gave a conservative outlook for its 2019 guidance. We have been leery of any acquisition that falls outside of its core distribution operations and our concerns have been borne out given the struggles of PharMEDium segment. Nevertheless, we are pleased management has chosen to refocus the firm back toward optimizing its pharmaceutical distribution operations and institute a $1 billion share repurchase program along with a 5% increase to the dividend. We believe this capital allocation strategy is better for shareholders.