EUR 850.00 For Business Accounts Only

Morningstar | Premier Announces in Line 3Q and Divestiture of Its Specialty Pharmacy Unit; Shares Attractive

Narrow-moat Premier reported fiscal third-quarter financials that were consistent with our expectations; revenue was a bit lower than we projected, but profitability was roughly in line. We don't intend to make any substantial changes to our forecast, but will likely raise our $40 per share fair value estimate by a mid-single-digit percentage to account for the cash flows received since our last update.

While this year's change in revenue recognition accounting standard continues to obscure underlying performance, it appears business trends remain consistent with our expectations. On a comparable accounting basis administrative fees were up roughly 2.4% versus last year compared with the performance services division that declined at a mid-single-digit rate due to weakness in ambulatory regulatory reporting. The products business grew roughly 4% but continues to see meaningful year-over-year margin degradation.

As a result, management also announced the pending divestiture of its specialty pharmacy assets to CVS Health. This represents the bulk of the firm's products business, accounting for $470 million of the approximately $640 million in revenue expected from the segment in fiscal 2019. Exiting this business is expected to increase the firm's pretax income by roughly $6 million for the full year. We noted last quarter that we viewed this capability as noncore to the firm's narrow economic moat, and we don't anticipate a change to our view due to the divestiture.

While we think disposing of the asset is the right move, the $42.5 million in potential net proceeds (including working capital) is a disappointing about-face after spending roughly $63 million to acquire the Acro pharmacy business in 2016. Management anticipates the sale will result in roughly $90 million in asset write-downs associated with both Acro and its legacy specialty business. This figure represents roughly 8% of its acquisition capital deployed since becoming a public company.

On a more positive note, we continue to applaud the firm's flexible share repurchase strategy. Management has stepped up its buyback as the share price has fallen well below our estimate of intrinsic value, exhausting its $250 million authorization in the quarter. The board approved another $300 million repurchase plan, and we expect this to continue to be a primary avenue for capital deployment while the firm's valuation remains depressed.