Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how Amerisource Bergen fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â 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 Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- 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
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$40.82|
|Value Based on 0% Growth||$23.93|
|Market Implied Growth Rate||7.40%|
|Net Current Asset Value (NCAV)||-$10.07|
Balance Sheet – 12/31/2013
Earnings Per Share
Earnings Per Share – ModernGraham
Amerisource Bergen is not suitable for either the Defensive Investor or the Enterprising Investor at this time. Â For the Defensive Investor, the company’s current ratio is too low, and it is trading at high PEmg and PB ratios. Â For the Enterprising Investor, the company has too much debt relative to its current assets. Â As a result, value investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities, through a review of ModernGraham’s valuation of Cardinal Health (CAH) and 5 Undervalued Companies for the Enterprising Investor. Â From a valuation perspective, the company appears to be fairly valued, having grown its EPSmg (normalized earnings) from $1.73 in 2010 to an estimated $2.82 for 2014. Â This level of demonstrated earnings growth supports the market’s implied estimate of 7.40% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls within a margin of safety relative to the market price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Amerisource Bergen (ABC)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
If you like our valuations, why not check outÂ ModernGraham Stocks & Screens? Â It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!
Disclaimer: Â The author did not hold a position in Amerisource Bergen (ABC) or any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from wikipedia; this article is not affiliated with the company in any manner.