Pharmaceutical distributors are on a roll: McKesson Corporation (NYSE:MCK), AmerisourceBergen Corporation (NYSE:ABC), and Cardinal Health (NYSE:CAH) are among the best-performing healthcare stocks this year in the S&P 500.
Are their heady valuations justifiable? This article attempts to put things into perspective as the trio, the shares of which often move in tandem in response to notable industry events, is scheduled to report their quarterly earnings this week.
While the S&P 500 has lost ~18% this year, McKesson (MCK) and Cardinal Health (CAH) have taken the lead in healthcare, rising ~59% and ~50%, respectively. The relative underperformer in the group, AmerisourceBergen (ABC), remains among the top ten best-performing healthcare stocks with a ~20% gain.
The rally reflects the resolution of their opioid-related legal overhang: Early this year, the three medical distributors reached a multibillion-dollar nationwide settlement to resolve the vast majority of opioid-related lawsuits they had been battling for years.
However, the Seeking Alpha Quant Rating System, which consistently beats the market, indicates Hold ratings for all three companies, while Wall Street analysts have Buy ratings on both McKesson (MCK) and AmerisourceBergen (ABC) and a Hold rating on Cardinal Health (CAH).
The views of Seeking Alpha Contributors on drug distributors are also mixed: Based on articles published over the last 30 days, AmerisourceBergen (ABC) and Cardinal Health (CAH) are Buy rated, and McKesson (MCK) has a Hold rating.
After a ~94% rise over the past 12 months, McKesson (MCK), the best performer, trades with a ~48% premium to the five-year average of forward non-GAAP P/E. Yet, SA contributor The Value Investor thinks MCK stands “far from the overvalued territory.”
Noting MCK’s multiples have approached the 2017 level thanks mainly to a range of factors including share repurchases, and solid business execution, the author suggests profit-taking as hundreds of millions of opioid-related payments are due in the years ahead.
With its shares adding only ~24% over the past five years compared to more than twofold rise in MCK and ABC, Cardinal Health (CAH), the smallest of the three, has become a target of activist investor Elliott Investment Management.
It remains to be seen if the recently implemented value creation measures and changes to the board could bring meaningful transformations to the Dublin, Ohio-based company with its former finance chief Jason Hollar at the helm as the new Chief Executive.
However, Seeking Alpha contributor Out of Ignorance remains on the sidelines, waiting to see if the company can turn around its underperforming medical segment.
In terms of valuation, AmerisourceBergen (ABC) appears compelling, trading at only ~11% premium to the five-year average of forward non-GAAP P/E indicating the narrowest valuating gap among all three.
While the company also has strong fundamentals with the best five-year topline growth and EBITDA margin compared to its rivals, The Value Investor is cautious given the relative outperformance in its shares.
Meanwhile, SA contributor, Herman Schroeder, issues a Buy rating on ABC, noting it as an attractive entry point for an industry expected to retain 1% of all U.S. pharma expenditure.