What's In Store For AmerisourceBergen (ABC) In Q2 Earnings?

AmerisourceBergen Corporation’s (NYSE:ABC) second-quarter fiscal 2018 results, scheduled for release on May 2, are expected to show steady growth in the Pharmaceutical Distribution segment, a significant contributor to revenues.

In the last reported quarter, the company posted adjusted earnings of $1.55 per share, beating the Zacks Consensus Estimate of $1.35 and improving 14% year over year. The upside was attributed to strong growth in the company’s Pharmaceutical Distribution Segment and World Courier business. Revenues improved almost 6% to $40.47 billion in the previous quarter and beat the Zacks Consensus Estimate of $40.37 billion.

For the quarter to be reported, the Zacks Consensus Estimate for revenues is pegged at $40.49 billion, reflecting a rise of 9% year over year. The Zacks Consensus Estimate for earnings is pegged at $1.83, indicating an increase of 3.4% year over year.

Let’s dig deeper to analyze how things are shaping up before the earnings announcements.

Pharmaceutical Distribution to Boost Q2 Results

Pharmaceutical Distribution accounted for 96.2% of total revenues in the last quarter. Revenues in the segment were $38.94 billion, up 5.8% on a year-over-year basis. Operating income was $388.2 million, up 2.4% year over year.

For the upcoming quarterly results, the Zacks Consensus Estimate for Pharmaceutical Distribution segment is pegged at $38.88 billion. The figure reflects an increase of 9.5% from the year-ago figure.

Strong organic growth rates in the U.S. pharmaceutical market, improving patient access to medical care, improved economic conditions and population demographics, introduction of new innovative drugs like hepatitis C drugs along with a consistent good brand-pricing environment should drive growth for AmerisourceBergen in the quarter to be reported.

AmerisourceBergen Corporation Price and EPS Surprise

Moreover, the company’s focus on specialty drugs bodes well. Per the IMS, pharmaceutical sales are estimated to grow approximately 7.1% annually over a five-year period through 2020, courtesy of strong demand, favorable pricing and new product introductions.

The deals signed by AmerisourceBergen look encouraging, which are likely to boost the top line. The company entered into a strategic agreement with Walgreen Boots Alliance. The deal includes a 10-year pharmaceutical distribution contract, under which the company will distribute branded and generic pharmaceutical products to Walgreens.

However, the segment is likely to be affected by lower-than-expected production at PharMEDium's Memphis 503B outsourcing facility. Notably, operations in the facility were voluntarily suspended by the company in the last quarter following a few inspections by the FDA.

Other Factors to Consider

Generics & Product Launches to Drive Growth: We believe that AmerisourceBergen will benefit from generics growth in the long run. In the last quarter, AmerisourceBergen marked its 16th consecutive quarter with 10% or greater revenue growth in the business. Management confirmed that its strategic and focused effort is driving generic product volume growth to offset historic deflation rates.

However, it's important to highlight that AmerisourceBergen will have about a 25% increase in quarterly interest expense beginning from the second quarter.

Operational Efficiencies: The recent U.S. tax legislation has enhanced AmerisourceBergen’s ability to invest in business, innovate and deliver value to its shareholders. Over the long term, this enables AmerisourceBergen to boost its U.S. business.

Recently, the company made strategic investments in IT systems to realize greater operational efficiency and increase operating leverage. This is likely to boost the company's results in the second quarter.

In fact, AmerisourceBergen also announced its plans to roll out eight new IT systems and a new e-commerce platform at MWI. These should enhance the company’s results in the quarter to be reported.

Guidance: Based upon the expectations from the recently legislated U.S. tax reform, AmerisourceBergen raised guidance for fiscal 2018. Notably, AmerisourceBergen’s strong guidance for fiscal 2018 indicates that the company expects to deliver solid results from the second quarter itself.

The company expects adjusted earnings per share in the range of $6.45-$6.65, up from the previously range of $5.90-$6.15. Revenue growth for fiscal 2018 is expected in the range of 8-11%, up from the previous band of 7-9%.

PharMEDium Slows Down: Recently, AmerisourceBergen received a grand jury subpoena from the U.S. Attorney's Office for the Western District of Tennessee for documents about its lab testing of a certain type of syringe made at its PharMEDium lab in Memphis, which is the company’s largest highly automated production facility. As a result of the subpoena, AmerisorceBergen suspended operations and recalled all of the products that had yet to expire. In fact, the FDA also visited this facility for the same reason. Sluggishness in this unit is likely to hamper the company’s specialty distribution segment in the quarter to be reported.

In the last reported quarter, the segment's results were negatively impacted by PharMEDium, wherein the company had lower-than-expected revenues and profit contribution.

Per management, because of the time and certain ongoing incremental expenses required to perform remedial measures, PharMEDium's contribution to adjusted EBIT and EPS in the second quarter will be lower than anticipated.

Earnings Whispers

Our proven model does not show an earnings beat for AmerisourceBergen in the second quarter. This is because a stock needs to have a positive Earnings ESPand a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: AmerisourceBergen has an Earnings ESP of -1.55%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: AmerisourceBergen carries a Zacks Rank #3.

Here are a few medical stocks worth considering as they have the right combination of elements to post an earnings beat this quarter.

The Cooper Companies, Inc. (NYSE:COO) has an Earnings ESP of +0.26% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Teleflex Incorporated (NYSE:TFX) has an Earnings ESP of +0.58% and a Zacks Rank #3.

AbbVie Inc. (NYSE:ABBV) has an Earnings ESP of +0.06% and a Zacks Rank #3.

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