Intrinsic value of AmerisourceBergen - ABC

Previous Close

$83.21

  Intrinsic Value

$164.71

stock screener

  Rating & Target

str. buy

+98%

Previous close

$83.21

 
Intrinsic value

$164.71

 
Up/down potential

+98%

 
Rating

str. buy

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of ABC stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 18.2

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  8.01
  4.90
  4.91
  4.92
  4.93
  4.93
  4.94
  4.95
  4.95
  4.96
  4.96
  4.97
  4.97
  4.97
  4.97
  4.98
  4.98
  4.98
  4.98
  4.98
  4.99
  4.99
  4.99
  4.99
  4.99
  4.99
  4.99
  4.99
  4.99
  4.99
  5.00
Revenue, $m
  146,850
  154,046
  161,609
  169,559
  177,913
  186,692
  195,916
  205,608
  215,790
  226,487
  237,723
  249,527
  261,925
  274,947
  288,625
  302,990
  318,077
  333,922
  350,562
  368,038
  386,390
  405,662
  425,901
  447,154
  469,472
  492,908
  517,518
  543,361
  570,497
  598,992
  628,914
Variable operating expenses, $m
 
  137,996
  144,742
  151,832
  159,283
  167,114
  175,341
  183,985
  193,067
  202,607
  212,629
  222,558
  233,616
  245,231
  257,430
  270,242
  283,699
  297,831
  312,673
  328,260
  344,629
  361,818
  379,869
  398,826
  418,731
  439,635
  461,585
  484,634
  508,838
  534,253
  560,941
Fixed operating expenses, $m
 
  14,466
  14,827
  15,198
  15,578
  15,968
  16,367
  16,776
  17,195
  17,625
  18,066
  18,517
  18,980
  19,455
  19,941
  20,440
  20,951
  21,475
  22,011
  22,562
  23,126
  23,704
  24,297
  24,904
  25,527
  26,165
  26,819
  27,489
  28,177
  28,881
  29,603
Total operating expenses, $m
  145,324
  152,462
  159,569
  167,030
  174,861
  183,082
  191,708
  200,761
  210,262
  220,232
  230,695
  241,075
  252,596
  264,686
  277,371
  290,682
  304,650
  319,306
  334,684
  350,822
  367,755
  385,522
  404,166
  423,730
  444,258
  465,800
  488,404
  512,123
  537,015
  563,134
  590,544
Operating income, $m
  1,526
  1,584
  2,040
  2,529
  3,052
  3,611
  4,209
  4,847
  5,528
  6,254
  7,028
  8,451
  9,329
  10,261
  11,253
  12,307
  13,427
  14,616
  15,877
  17,216
  18,635
  20,140
  21,735
  23,425
  25,214
  27,109
  29,115
  31,237
  33,483
  35,858
  38,370
EBITDA, $m
  1,919
  2,360
  2,824
  3,322
  3,855
  4,424
  5,032
  5,682
  6,375
  7,113
  7,900
  8,737
  9,629
  10,576
  11,584
  12,654
  13,791
  14,998
  16,279
  17,637
  19,078
  20,605
  22,223
  23,937
  25,752
  27,674
  29,707
  31,860
  34,136
  36,544
  39,091
Interest expense (income), $m
  124
  135
  74
  124
  177
  232
  291
  352
  416
  484
  554
  629
  707
  789
  876
  966
  1,061
  1,161
  1,266
  1,377
  1,493
  1,614
  1,742
  1,876
  2,017
  2,165
  2,320
  2,483
  2,654
  2,834
  3,023
Earnings before tax, $m
  1,391
  1,449
  1,966
  2,404
  2,874
  3,378
  3,918
  4,495
  5,112
  5,771
  6,474
  7,823
  8,621
  9,472
  10,378
  11,341
  12,366
  13,454
  14,611
  15,839
  17,143
  18,526
  19,993
  21,549
  23,197
  24,944
  26,795
  28,754
  30,829
  33,024
  35,347
Tax expense, $m
  -37
  391
  531
  649
  776
  912
  1,058
  1,214
  1,380
  1,558
  1,748
  2,112
  2,328
  2,557
  2,802
  3,062
  3,339
  3,633
  3,945
  4,277
  4,629
  5,002
  5,398
  5,818
  6,263
  6,735
  7,235
  7,764
  8,324
  8,916
  9,544
Net income, $m
  1,428
  1,058
  1,435
  1,755
  2,098
  2,466
  2,860
  3,282
  3,732
  4,213
  4,726
  5,710
  6,294
  6,915
  7,576
  8,279
  9,027
  9,822
  10,666
  11,563
  12,514
  13,524
  14,595
  15,730
  16,934
  18,209
  19,560
  20,991
  22,505
  24,108
  25,803

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  2,742
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  33,638
  32,410
  34,002
  35,674
  37,432
  39,279
  41,220
  43,259
  45,401
  47,651
  50,015
  52,499
  55,107
  57,847
  60,725
  63,747
  66,921
  70,255
  73,756
  77,433
  81,294
  85,349
  89,607
  94,078
  98,774
  103,705
  108,882
  114,320
  120,029
  126,024
  132,319
Adjusted assets (=assets-cash), $m
  30,896
  32,410
  34,002
  35,674
  37,432
  39,279
  41,220
  43,259
  45,401
  47,651
  50,015
  52,499
  55,107
  57,847
  60,725
  63,747
  66,921
  70,255
  73,756
  77,433
  81,294
  85,349
  89,607
  94,078
  98,774
  103,705
  108,882
  114,320
  120,029
  126,024
  132,319
Revenue / Adjusted assets
  4.753
  4.753
  4.753
  4.753
  4.753
  4.753
  4.753
  4.753
  4.753
  4.753
  4.753
  4.753
  4.753
  4.753
  4.753
  4.753
  4.753
  4.753
  4.753
  4.753
  4.753
  4.753
  4.753
  4.753
  4.753
  4.753
  4.753
  4.753
  4.753
  4.753
  4.753
Average production assets, $m
  3,843
  4,005
  4,202
  4,409
  4,626
  4,854
  5,094
  5,346
  5,611
  5,889
  6,181
  6,488
  6,810
  7,149
  7,504
  7,878
  8,270
  8,682
  9,115
  9,569
  10,046
  10,547
  11,073
  11,626
  12,206
  12,816
  13,455
  14,127
  14,833
  15,574
  16,352
Working capital, $m
  -2,428
  -4,775
  -5,010
  -5,256
  -5,515
  -5,787
  -6,073
  -6,374
  -6,689
  -7,021
  -7,369
  -7,735
  -8,120
  -8,523
  -8,947
  -9,393
  -9,860
  -10,352
  -10,867
  -11,409
  -11,978
  -12,576
  -13,203
  -13,862
  -14,554
  -15,280
  -16,043
  -16,844
  -17,685
  -18,569
  -19,496
Total debt, $m
  4,463
  2,123
  3,555
  5,061
  6,643
  8,305
  10,052
  11,887
  13,815
  15,840
  17,968
  20,203
  22,551
  25,016
  27,606
  30,326
  33,183
  36,183
  39,334
  42,643
  46,118
  49,768
  53,600
  57,624
  61,850
  66,288
  70,948
  75,842
  80,980
  86,376
  92,041
Total liabilities, $m
  31,508
  29,169
  30,601
  32,107
  33,689
  35,351
  37,098
  38,933
  40,861
  42,886
  45,014
  47,249
  49,597
  52,062
  54,652
  57,372
  60,229
  63,229
  66,380
  69,689
  73,164
  76,814
  80,646
  84,670
  88,896
  93,334
  97,994
  102,888
  108,026
  113,422
  119,087
Total equity, $m
  2,129
  3,241
  3,400
  3,567
  3,743
  3,928
  4,122
  4,326
  4,540
  4,765
  5,002
  5,250
  5,511
  5,785
  6,072
  6,375
  6,692
  7,025
  7,376
  7,743
  8,129
  8,535
  8,961
  9,408
  9,877
  10,370
  10,888
  11,432
  12,003
  12,602
  13,232
Total liabilities and equity, $m
  33,637
  32,410
  34,001
  35,674
  37,432
  39,279
  41,220
  43,259
  45,401
  47,651
  50,016
  52,499
  55,108
  57,847
  60,724
  63,747
  66,921
  70,254
  73,756
  77,432
  81,293
  85,349
  89,607
  94,078
  98,773
  103,704
  108,882
  114,320
  120,029
  126,024
  132,319
Debt-to-equity ratio
  2.096
  0.660
  1.050
  1.420
  1.770
  2.110
  2.440
  2.750
  3.040
  3.320
  3.590
  3.850
  4.090
  4.320
  4.550
  4.760
  4.960
  5.150
  5.330
  5.510
  5.670
  5.830
  5.980
  6.130
  6.260
  6.390
  6.520
  6.630
  6.750
  6.850
  6.960
Adjusted equity ratio
  -0.020
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  1,428
  1,058
  1,435
  1,755
  2,098
  2,466
  2,860
  3,282
  3,732
  4,213
  4,726
  5,710
  6,294
  6,915
  7,576
  8,279
  9,027
  9,822
  10,666
  11,563
  12,514
  13,524
  14,595
  15,730
  16,934
  18,209
  19,560
  20,991
  22,505
  24,108
  25,803
Depreciation, amort., depletion, $m
  393
  776
  784
  793
  803
  813
  824
  835
  846
  859
  871
  286
  300
  315
  331
  347
  364
  382
  402
  422
  443
  465
  488
  512
  538
  565
  593
  622
  653
  686
  720
Funds from operations, $m
  4,207
  1,834
  2,219
  2,548
  2,901
  3,279
  3,684
  4,116
  4,578
  5,071
  5,597
  5,996
  6,594
  7,230
  7,906
  8,626
  9,391
  10,204
  11,068
  11,984
  12,957
  13,989
  15,083
  16,243
  17,472
  18,774
  20,153
  21,613
  23,158
  24,794
  26,524
Change in working capital, $m
  1,028
  -223
  -234
  -246
  -259
  -272
  -286
  -300
  -316
  -332
  -348
  -366
  -384
  -404
  -424
  -445
  -468
  -491
  -516
  -542
  -569
  -597
  -627
  -659
  -692
  -727
  -763
  -801
  -841
  -883
  -928
Cash from operations, $m
  3,179
  2,057
  2,454
  2,795
  3,160
  3,551
  3,970
  4,417
  4,894
  5,403
  5,946
  6,362
  6,978
  7,633
  8,330
  9,071
  9,859
  10,695
  11,583
  12,526
  13,526
  14,586
  15,710
  16,901
  18,164
  19,500
  20,916
  22,414
  24,000
  25,677
  27,451
Maintenance CAPEX, $m
  0
  -169
  -176
  -185
  -194
  -204
  -214
  -224
  -235
  -247
  -259
  -272
  -286
  -300
  -315
  -331
  -347
  -364
  -382
  -402
  -422
  -443
  -465
  -488
  -512
  -538
  -565
  -593
  -622
  -653
  -686
New CAPEX, $m
  -465
  -163
  -197
  -207
  -217
  -228
  -240
  -252
  -265
  -278
  -292
  -307
  -322
  -339
  -356
  -373
  -392
  -412
  -433
  -454
  -477
  -501
  -526
  -553
  -580
  -609
  -640
  -672
  -706
  -741
  -778
Cash from investing activities, $m
  -3,169
  -332
  -373
  -392
  -411
  -432
  -454
  -476
  -500
  -525
  -551
  -579
  -608
  -639
  -671
  -704
  -739
  -776
  -815
  -856
  -899
  -944
  -991
  -1,041
  -1,092
  -1,147
  -1,205
  -1,265
  -1,328
  -1,394
  -1,464
Free cash flow, $m
  10
  1,725
  2,081
  2,403
  2,749
  3,119
  3,516
  3,940
  4,394
  4,878
  5,394
  5,783
  6,370
  6,995
  7,660
  8,367
  9,120
  9,919
  10,768
  11,670
  12,627
  13,642
  14,719
  15,861
  17,071
  18,353
  19,711
  21,149
  22,672
  24,283
  25,987
Issuance/(repayment) of debt, $m
  713
  -1,730
  1,432
  1,505
  1,582
  1,662
  1,747
  1,835
  1,928
  2,025
  2,128
  2,235
  2,348
  2,466
  2,590
  2,720
  2,857
  3,000
  3,151
  3,309
  3,475
  3,649
  3,832
  4,024
  4,226
  4,438
  4,660
  4,893
  5,138
  5,396
  5,666
Issuance/(repurchase) of shares, $m
  169
  2,186
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  853
  456
  1,432
  1,505
  1,582
  1,662
  1,747
  1,835
  1,928
  2,025
  2,128
  2,235
  2,348
  2,466
  2,590
  2,720
  2,857
  3,000
  3,151
  3,309
  3,475
  3,649
  3,832
  4,024
  4,226
  4,438
  4,660
  4,893
  5,138
  5,396
  5,666
Total cash flow (excl. dividends), $m
  862
  2,181
  3,513
  3,908
  4,331
  4,782
  5,263
  5,775
  6,322
  6,903
  7,522
  8,018
  8,717
  9,461
  10,250
  11,087
  11,976
  12,919
  13,919
  14,979
  16,102
  17,292
  18,552
  19,885
  21,297
  22,791
  24,371
  26,043
  27,810
  29,678
  31,653
Retained Cash Flow (-), $m
  -1,513
  -3,244
  -159
  -167
  -176
  -185
  -194
  -204
  -214
  -225
  -236
  -248
  -261
  -274
  -288
  -302
  -317
  -333
  -350
  -368
  -386
  -405
  -426
  -447
  -470
  -493
  -518
  -544
  -571
  -600
  -630
Prev. year cash balance distribution, $m
 
  2,132
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  1,069
  3,354
  3,741
  4,155
  4,597
  5,069
  5,572
  6,107
  6,678
  7,285
  7,770
  8,457
  9,187
  9,962
  10,785
  11,659
  12,586
  13,569
  14,611
  15,716
  16,886
  18,126
  19,438
  20,828
  22,298
  23,854
  25,499
  27,239
  29,079
  31,023
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  1,025
  3,070
  3,256
  3,421
  3,563
  3,679
  3,764
  3,817
  3,836
  3,819
  3,690
  3,609
  3,493
  3,344
  3,166
  2,963
  2,739
  2,499
  2,250
  1,997
  1,747
  1,504
  1,274
  1,061
  867
  696
  547
  421
  317
  234
Current shareholders' claim on cash, %
  100
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0
  50.0

AmerisourceBergen Corporation is a pharmaceutical sourcing and distribution services company. The Company's segments include Pharmaceutical Distribution and Other. The Company provides services to healthcare providers, and pharmaceutical and biotech manufacturers. As of June 30, 2016, the Pharmaceutical Distribution segment consists of two operating segments, including the operations of AmerisourceBergen Drug Corporation (ABDC) and AmerisourceBergen Specialty Group (ABSG), which distributes specialty drugs to their customers. Servicing healthcare providers in the pharmaceutical supply channel, the Pharmaceutical Distribution segment's operations provide drug distribution and related services. The Other segment consists of the operations of various segments, including the AmerisourceBergen Consulting Services (ABCS), the World Courier Group, Inc. and the MWI Veterinary Supply, Inc. ABSG operates distribution facilities that focus primarily on complex disease treatment regimens.

FINANCIAL RATIOS  of  AmerisourceBergen (ABC)

Valuation Ratios
P/E Ratio 12.8
Price to Sales 0.1
Price to Book 8.6
Price to Tangible Book
Price to Cash Flow 5.8
Price to Free Cash Flow 6.7
Growth Rates
Sales Growth Rate 8%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 100.4%
Cap. Spend. - 3 Yr. Gr. Rate 18.1%
Financial Strength
Quick Ratio 4
Current Ratio 0
LT Debt to Equity 181%
Total Debt to Equity 209.6%
Interest Coverage 12
Management Effectiveness
Return On Assets 5%
Ret/ On Assets - 3 Yr. Avg. 1.9%
Return On Total Capital 26.1%
Ret/ On T. Cap. - 3 Yr. Avg. 10%
Return On Equity 104%
Return On Equity - 3 Yr. Avg. 35.4%
Asset Turnover 4.8
Profitability Ratios
Gross Margin 2.8%
Gross Margin - 3 Yr. Avg. 2.6%
EBITDA Margin 1.3%
EBITDA Margin - 3 Yr. Avg. 0.8%
Operating Margin 1%
Oper. Margin - 3 Yr. Avg. 0.7%
Pre-Tax Margin 0.9%
Pre-Tax Margin - 3 Yr. Avg. 0.6%
Net Profit Margin 1%
Net Profit Margin - 3 Yr. Avg. 0.4%
Effective Tax Rate -2.7%
Eff/ Tax Rate - 3 Yr. Avg. 68.9%
Payout Ratio 20.2%

ABC stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the ABC stock intrinsic value calculation we used $146850 million for the last fiscal year's total revenue generated by AmerisourceBergen. The default revenue input number comes from 2016 income statement of AmerisourceBergen. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our ABC stock valuation model: a) initial revenue growth rate of 4.9% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for ABC is calculated based on our internal credit rating of AmerisourceBergen, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of AmerisourceBergen.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of ABC stock the variable cost ratio is equal to 89.6%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $14113 million in the base year in the intrinsic value calculation for ABC stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for AmerisourceBergen.

Corporate tax rate of 27% is the nominal tax rate for AmerisourceBergen. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the ABC stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for ABC are equal to 2.6%.

Life of production assets of 22.7 years is the average useful life of capital assets used in AmerisourceBergen operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for ABC is equal to -3.1%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $2129 million for AmerisourceBergen - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 219.084 million for AmerisourceBergen is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of AmerisourceBergen at the current share price and the inputted number of shares is $18.2 billion.

Management's discussion and analysis

We are one of the largest global pharmaceutical sourcing and distribution services companies, helping both healthcare providers and pharmaceutical and biotech manufacturers improve patient access to products and enhance patient care. We deliver innovative programs and services designed to increase the effectiveness and efficiency of the pharmaceutical supply chain in both human and animal health. We are organized based upon the products and services we provide to our customers. Our operations are comprised of the Pharmaceutical Distribution reportable segment and Other.

Pharmaceutical Distribution Segment

The Pharmaceutical Distribution reportable segment is comprised of two operating segments, which include the operations of ABDC and ABSG. Servicing healthcare providers in the pharmaceutical supply channel, the Pharmaceutical Distribution segment's operations provide drug distribution and related services designed to reduce healthcare costs and improve patient outcomes.
ABDC distributes a comprehensive offering of brand-name and generic pharmaceuticals (including specialty pharmaceutical products), over-the-counter healthcare products, home healthcare supplies and equipment, outsourced CSPs, and related services to a wide variety of healthcare providers, including acute care hospitals and health systems, independent and chain retail pharmacies, mail order pharmacies, medical clinics, long-term care and alternate site pharmacies, and other customers. ABDC also provides pharmacy management, staffing and additional consulting services, and supply management software to a variety of retail and institutional healthcare providers. Additionally, ABDC delivers packaging solutions to institutional and retail healthcare providers.
ABSG, through a number of operating businesses, provides pharmaceutical distribution and additional services to physicians who specialize in a variety of disease states, especially oncology, and to other healthcare providers, including hospitals and dialysis clinics. ABSG also distributes plasma and other blood products, injectible pharmaceuticals, vaccines, and other specialty products. Additionally, ABSG provides third party logistics, outcomes research, and additional services for biotechnology and pharmaceutical manufacturers.
Our use of the term "specialty" and "specialty pharmaceutical products" refers to drugs used to treat complex diseases, such as cancer, diabetes, and multiple sclerosis. Specialty pharmaceutical products are part of complex treatment regimens for serious conditions and diseases that generally require ongoing clinical monitoring. We believe the terms "specialty" and "specialty pharmaceutical products" are used consistently by industry participants and our competitors. However, we cannot be certain that other distributors of specialty products define these and other similar terms in exactly the same manner as we do.
Both ABDC and ABSG distribute specialty drugs to their customers, with the principal difference between these two operating segments being that ABSG operates distribution facilities that focus primarily on complex disease treatment regimens. Therefore, a product distributed from one of ABSG's distribution facilities results in revenue reported under ABSG, and a product distributed from one of ABDC's distribution centers results in revenue reported under ABDC. Essentially all of ABSG's sales consist of specialty pharmaceutical products. ABDC's sales of specialty pharmaceutical products have historically been a relatively small component of its overall revenue.

Other

Other consists of the ABCS operating segment, the World Courier operating segment, and the MWI operating segment. The results of operations of these operating segments are not significant enough to require separate reportable segment disclosure, and therefore, have been included in "Other" for the purpose of our reportable segment presentation.
ABCS, through a number of operating businesses, provides commercialization support services including reimbursement support programs, outcomes research, contract field staffing, patient assistance and co-pay assistance programs, adherence programs, risk mitigation services, and other market access programs to pharmaceutical and biotechnology manufacturers. World Courier, which operates in over 50 countries, is a leading global specialty transportation and logistics provider for the biopharmaceutical industry. MWI is a leading animal health distribution company in the United States and in the United Kingdom. MWI sells pharmaceuticals, vaccines, parasiticides, diagnostics, micro feed ingredients, and various other products to customers in both the companion animal and production animal markets.

Recent Developments

In August 2016, we and WBA amended the 2017 Warrants so that they became exercisable in whole or in part during the six month period beginning in August 2016 at an exercise price of $52.50. In August 2016, WBA exercised the 2017 Warrants and purchased 22,696,912 shares of our Common Stock for $1,191.6 million. The earnings per share dilutive effect of the exercise of the Warrants was fully mitigated by our hedging a portion of our obligation to deliver common stock with a financial institution and repurchasing additional shares of our Common Stock under special share repurchase programs for our own account over time.
In November 2016, our board of directors authorized a new share repurchase program allowing us to purchase up to $1.0 billion in shares of our Common Stock, subject to market conditions.

Executive Summary

This executive summary provides highlights from the results of operations that follow:
   
Revenue increased 8.0% from the prior fiscal year as a result of ABDC's increased sales of brand and generic products and the strong revenue growth of ABSG. The addition of MWI, which was acquired in February 2015, also contributed to the revenue growth in the current fiscal year;
   
Pharmaceutical Distribution gross profit increased 2.9% from the prior fiscal year as the result of the contribution from our recent PharMEDium acquisition and segment revenue growth. Gross profit growth in the current fiscal year benefited from the incremental income from ABDC's participation in the WBA global sourcing arrangement and was adversely impacted by lower generic price appreciation, an increase in generic price deflation, and contract renewals with the Department of Defense ("DOD"), a significant GPO customer, and Kaiser Permanente ("Kaiser"), at less favorable terms;
   
Total gross profit increased 21.1% from the prior fiscal year primarily due to the addition of MWI, a reduction in LIFO expense, which was $200.2 million in the current fiscal year in comparison to $542.8 million in the prior fiscal year, and an increased gain from antitrust litigation settlements, which was $133.8 million in the current fiscal year in comparison to $65.5 million in the prior fiscal year;
   
Distribution, selling, and administrative expenses increased 9.6% from the prior fiscal year, primarily due to the addition of MWI, and to a lesser extent, PharMEDium;
   
Total operating expenses were impacted by Warrants. Warrants expense was $140.3 million in the current fiscal year compared $912.7 million in the prior fiscal year. Warrants expense decreased significantly from the prior fiscal year primarily due to the decline in our stock price since September 30, 2015. Amortization expense increased $96.0 million from the prior fiscal year primarily due to the amortization of intangible assets originating from the PharMEDium and MWI acquisitions. We incurred significantly more employee severance costs in the current fiscal year due to an initiative to improve operating efficiency, and we also incurred a settlement charge during the current fiscal year in connection with the final settlement of our salaried defined benefit pension plan;
   
Total segment operating income increased by 6.6% compared to the prior fiscal year, primarily due to the additions of MWI and PharMEDium; and
   
Income taxes were a benefit of $37.0 million in the current fiscal year as compared to an expense of $407.1 million in the prior fiscal year. In November 2015, we received a private letter ruling from the Internal Revenue Service ("IRS"), which entitles us to an income tax deduction equal to the fair value of the Warrants on the date of exercise. As a result, we recorded a deferred tax asset and recognized a tax benefit adjustment of approximately $456 million, which represented the estimated benefit from the tax deduction for the increase in the fair value of the Warrants from the issuance date through September 30, 2015. This tax benefit adjustment had a significant impact to our effective tax rate in the fiscal year ended September 30, 2016. In March 2016 and August 2016, the Warrants were exercised by WBA, and an additional tax benefit of approximately $52 million was recognized primarily related to the change in the fair value of the Warrants from September 30, 2015 to their respective exercise dates in fiscal 2016. Our income tax rate was also favorably impacted in fiscal 2016 due to the growth of our international service offerings.

[Source: Form 10-K dated 2016-11-22]

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COMPANY NEWS

▶ AmerisourceBergen Declares Quarterly Dividend   [Aug-10-17 09:29AM  Business Wire]
▶ Why AmerisourceBergen Corp. Fell Dramatically Today   [Aug-03-17 06:19PM  Motley Fool]
▶ The Best Stock in Pennsylvania: AmerisourceBergen   [Jul-21-17 12:20PM  Kiplinger]
▶ Ohio sues five drug companies over opioid crisis   [May-31-17 02:20PM  Reuters]
▶ Plunging oil prices and energy companies hit stock indexes   [May-04-17 02:37PM  Associated Press]
▶ Correction Is Over for AmerisourceBergen   [May-01-17 03:29PM  TheStreet.com]
▶ AmerisourceBergen CEO on drug pricing: 'Weve had some bad actors'   [Apr-26-17 02:50PM  American City Business Journals]
▶ [$$] Cardinal Health to Buy Medtronic Businesses for $6.1 Billion   [Apr-18-17 11:25AM  The Wall Street Journal]
▶ What's working: Health and housing plays   [Feb-21-17 08:15AM  CNBC Videos]
▶ AmerisourceBergen plans $40 million Amazon-like distribution center in metro Atlanta   [Feb-16-17 11:42AM  American City Business Journals]
▶ Here's Why AmerisourceBergen Is Up 16% This Year   [Feb-15-17 09:24PM  TheStreet.com]
▶ AmerisourceBergen Declares Quarterly Dividend   [Feb-09-17 09:26AM  Business Wire]
▶ [$$] Comings & Goings   [Feb-01-17 10:26AM  at The Wall Street Journal]
Financial statements of ABC
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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