ModernGraham Valuation: Amerisource Bergen Corp. (ABC)

moneyCompany Profile (obtained from Google Finance): AmerisourceBergen Corporation (AmerisourceBergenis) is a pharmaceutical services company serving the United States, Canada and select global markets. The Company distributes a range of pharmaceuticalsgeneric pharmaceuticals, over-the-counter healthcare products, home healthcare supplies and equipment, and related services to a range of healthcare providers located in the United States, Canada and selected global markets, including acute care hospitals and health systems, independent and chain retail pharmacies, mail order pharmacies, medical and dialysis clinics, physicians and physician group practices, long-term care and other alternate site pharmacies, and other customers. In May 2013, the Company completed the divestiture of its contract packaging business, AndersonBrecon. In June 2013, the Company announced that has completed the divestiture of AmerisourceBergen Canada Corporation (ABCC).

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $67.18
MG Opinion Fairly Valued
Value Based on 3% Growth $34.11
Value Based on 0% Growth $20.00
Market Implied Growth Rate 10.60%
Net Current Asset Value (NCAV) -$9.59
PEmg 29.71
Current Ratio 0.97
PB Ratio 6.93

Balance Sheet – 9/30/2013 

Current Assets $14,393,700,000
Current Liabilities $14,870,600,000
Total Debt $1,396,600,000
Total Assets $18,918,600,000
Intangible Assets $3,499,700,000
Total Liabilities $16,598,900,000
Outstanding Shares 229,990,000

Earnings Per Share

2013 $2.10
2012 $2.76
2011 $2.54
2010 $2.22
2009 $1.69
2008 $1.45
2007 $1.32
2006 $1.13
2005 $0.68
2004 $0.99
2003 $0.98
2002 $0.79

Earnings Per Share – ModernGraham 

2013 $2.35
2012 $2.36
2011 $2.06
2010 $1.73
2009 $1.41
2008 $1.22


Amerisource Bergen Corp. is a company that has potential but doesn’t quite qualify for Intelligent Investors following Benjamin Graham’s methods.  The company does not qualify for the Defensive Investor because of its poor current ratio and high PEmg ratio, and fails to qualify for the Enterprising Investor because of its high level of current liabilities.  If the company could lessen its current liabilities significantly and improve its current ratio, the company would become attractive to value investors.  As it stands, investors may find better opportunities elsewhere, beginning by reviewing some companies that pass the requirements set forth by Benjamin Graham.  From a valuation perspective, the company has grown EPSmg (normalized earnings) from $1.22 in 2008 to $2.35 for 2013.  This level of growth supports the market’s implied estimate of 10.6%, which indicates the company may be fairly valued at the current time.

What do you think?  Do you agree that Amerisource Bergen Corp is fairly valued?  What would be your assessment?  Is the company not suitable for Defensive Investors or Enterprising Investors?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

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Disclaimer:  The author did not hold a position in Amerisource Bergen Corp (ABC) at the time of publication and had no intention of changing that position within the next 72 hours.

Photo Credit:  Andrew Magill





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