Extended Contracts Should Boost The Top-Line For AmerisourceBergen Corp

Argus reaffirmed its Buy rating and $135 price target on AmerisourceBergen Corp. (NYSE: ABC) shares as the extension of contracts with Kaiser Permanente and Express Scripts Holding Company (NASDAQ: ESRX) should boost revenue.

Kaiser and Express are two of ABC’s largest customers, with Express accounting for 16 percent of FY15 revenue, trailing only Walgreens Boots Alliance Inc (NASDAQ: WBA), at 30 percent. The Kaiser contract has been extended for five years, while Express Scripts contract extended for one year.

Related Link: UBS Initiates Coverage On AmerisourceBergen At Neutral

“At the same time, businesses such as MWI, PharMedium, and World Courier are driving higher profitability. As one of the largest pharmaceutical distributors, ABC is also likely benefit from the increased utilization of generic and specialty drugs,” analyst David Toung wrote in a note.

Toung expects ABC to improve its gross and operating margins as it absorbs the impact of contract repricing and generic price deflation. The company noted that deflation rate, currently in the high single digits, had not worsened from the previous quarter.

For the third quarter, adjusted EPS of $1.37 came in above the consensus estimate of $1.27. Revenue grew 7.7 percent to $36.9 billion.

The company now expects FY16 adjusted EPS of $5.52-$5.57, up from a prior view of $5.44-$5.54. For FY17, it expects adjusted EPS to grow 4-6 percent from the midpoint of its revised FY16 forecast. Toung also raised his adjusted EPS estimates to $5.54 from $5.52 for FY16 and to $6.12 from $6.10 for FY17.

On the valuation front, the analyst said ABC shares appear favorably valued at 13.0-times his FY17 EPS estimate, in line with the peer average for Argus coverage universe of pharma distribution stocks.

Shares of AmerisourceBergen closed Wednesday’s trading at $80.61. The $135 target implies potential upside of 67 percent.

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