6/28/2017 :: Ticker: GWW :: Div. Yield: 2.90% :: Closing Price: $176.96COMPANY DESCRIPTIONHeadquartered in Lake Forest, Illinois, W.W. Grainger is a global distributor of maintenance, repair and operating (MRO) equipment, supplies, and services. As a major supplier to the industrial sector, the company sells everything from gloves, safety equipment, AC units, to plumbing supplies. Its extensive product selection combined with its inventory management services has contributed to being a leader in the MRO market. Grainger serves roughly 3 million businesses and institutions worldwide via their network of distribution centers, websites, and branches. Donald Macpherson was appointed CEO in October 2016 and has been with Grainger since 2008. COMPANY HIGHLIGHTS AND FINANCIALSThe MRO market is highly fragmented but Grainger has separated itself from competitors by offering customized services and enhanced e-commerce platforms that cater to large customers. Approximately five thousand suppliers provide Grainger with more than 1.6 million products. Grainger maintains strong relationships with its active customers via enhanced inventory management solutions. It is estimated that Grainger controls 6% of the US market share in this space with its $10 billion in annual revenue. Through continued investments in e-commerce, Grainger has become the 11th largest website (by sales) in the US, which accounts for close to 50% of their revenues and 65% of their orders. Of the 250 branches that Grainger operates, the majority are company owned without mortgages, increasing balance sheet strength, and allowing for increased flexibility in their continued transition to digital platforms. The company’s operating performance has been very strong over time. The firm generates consistent operating margins, averaging 10% over the previous 10 years. They also generate much higher returns on capital than other logistics firms due to their low asset base and strong balance sheet (ROIC has averaged 18% over the last 10 years). This, combined with Grainger’s focus of returning cash to shareholders via dividends (45 consecutive years of dividend increases), and strategic buybacks, shows how focused and shareholder friendly the management team has been over time. With low debt and strong cash flow generation, this should allow Grainger to continue to grow over time and allow it to do so without excess leverage.
VALUATION AND RISKSGrainger is trading at a discount compared with historical valuations and below fair value based on scenario analysis of free cash flow growth. Grainger has a dividend yield of 2.90% and generates significant free cash flow, creating the flexibility to continue to raise their dividend over time. We expect the company to grow free cash flow on average at 4.5% over the next decade, below its historical average, due to increased competition and pricing pressure from clients. Modeling our conservative assumption places a price of $200.00 on shares which is almost a 12% premium based on current price. If our conservative assumptions turn out to be overly optimistic, we still feel there is a margin of safety built into the current price based on the company’s high returns on capital, strong cash flow generation, and strong balance sheet. The largest risks we view is an overall cyclical downturn in the global economy and increased competition from larger more diversified firms. Though we believe that Grainger’s strong customer relationships, technology platform, and diversified revenue stream would allow the company to continue to earn high returns on capital, it could put short term pressure on operating performance. Cairn Investment Group and its affiliates (“Cairn”) produces Company Spotlight reports (“Reports”) for its clients and the general public. The Reports are impersonal and do not provide individualized advice or recommendations for any specific investor or portfolio. Investing involves substantial risk. Cairn makes no guarantee or other promise as to any results that may be obtained from using the Reports. Past performance should not be considered indicative of future performance. No reader should make any investment decision without first conducting his or her own research and due diligence. At various times Cairn may own, buy or sell the securities discussed for purposes of investment or trading. Cairn disclaims any and all liability in the event any information, commentary, analysis, opinions, advice and/or recommendations in the Reports prove to be inaccurate, incomplete or unreliable or result in any investment or other losses.
The Reports commentary, analysis, opinions, advice and recommendations represent the then current views of Cairn, and are subject to change at any time. The information provided in the Reports is obtained from sources the author believes to be reliable. However, the author has not independently verified or otherwise investigated all such information. This is not a solicitation or offer to buy or sell any securities. Cairn does not receive any compensation from any of the companies featured in the Reports. Any redistribution of the Reports or the information contained therein, without the written consent of Cairn is strictly prohibited. 4/12/2017 :: Ticker: MCK :: Div. Yield: 0.78% :: Closing Price: $143.99COMPANY DESCRIPTIONHeadquartered in San Francisco, CA, McKesson is the largest U.S. pharmaceutical distribution and services company. The company provides its services to healthcare providers, pharmacies, and pharmaceutical manufactures. With the company since 1996, John Hammergan became CEO in 2002. COMPANY HIGHLIGHTS AND FINANCIALSMcKesson is the largest pharmaceutical distributor in the U.S., ahead of Cardinal Health and AmerisourceBergen. The high barriers to entry in this space allows McKesson to produce consistent and stable operating results as their large distribution network would be hard to emulate for a new company entering the market. In recent years, the company has expanded overseas with the acquisition of Celesio, a German based logistics provider to the healthcare sector. This acquisition furthers their focus on technology solutions, complimenting their pharmaceutical distribution arrangements. The company’s strong supply chain management, and large customer relationships allows them to generate significant cash flows even in a low margin business.
VALUATION AND RISKSMcKesson is trading at a discount compared to its historical valuations and below fair value based on scenario analysis of free cash flow growth. McKesson has a dividend yield of 0.78% and generates over $4 billion in free cash flow to give them the flexibility to continue to raise their dividend over time. On a free cash flow basis, we expect the company to grow cash flow at 1.5% annually over the next decade, below its current growth rate of 8% over the previous 10 years, due to higher pricing pressure on pharmaceuticals and high revenue concentration. Modeling our conservative assumption places a price of $190 on shares which is almost a 32% premium based on the price as of the date of this report. If our conservative assumptions turn out to still be overly optimistic, we feel there is a margin of safety built into the current price based on the company’s high returns on capital and strong cash flow generation. Though McKesson has only two main competitors in the pharmaceutical distribution business, it is a highly competitive environment. We would like to see continued discipline in regards to capital spending and renewed contracts with CVS when it expires in 2019. Continued focus on the company’s revenue breakdown, along with integration among its recent acquisitions will be areas to monitor closely. Weighing the potential rewards and risks, we are optimistic that McKesson will be a good long-term investment. Cairn Investment Group and its affiliates (“Cairn”) produces Company Spotlight reports (“Reports”) for its clients and the general public. The Reports are impersonal and do not provide individualized advice or recommendations for any specific investor or portfolio. Investing involves substantial risk. Cairn makes no guarantee or other promise as to any results that may be obtained from using the Reports. Past performance should not be considered indicative of future performance. No reader should make any investment decision without first conducting his or her own research and due diligence. At various times Cairn may own, buy or sell the securities discussed for purposes of investment or trading. Cairn disclaims any and all liability in the event any information, commentary, analysis, opinions, advice and/or recommendations in the Reports prove to be inaccurate, incomplete or unreliable or result in any investment or other losses.
The Reports commentary, analysis, opinions, advice and recommendations represent the then current views of Cairn, and are subject to change at any time. The information provided in the Reports is obtained from sources the author believes to be reliable. However, the author has not independently verified or otherwise investigated all such information. This is not a solicitation or offer to buy or sell any securities. Cairn does not receive any compensation from any of the companies featured in the Reports. Any redistribution of the Reports or the information contained therein, without the written consent of Cairn is strictly prohibited. Greetings from the Northwest. I know that all of you as our wonderful investors have now torn open your report to read the ever stimulating and maybe even exotic newsletter. But, before we get to the volatility, changeability, and shifting sands of investments, I thought we would reflect for just a second about the weather we’ve had. This poem was handed to me by a gentlemen from a northwest family that has been with us for a long time. And for the first one of those family members who recalls this and contacts us, we’ll give you an opportunity to submit yet another poem for next quarter. We had a terrific 2016. We followed with a solid first quarter of 2017. Now we’re looking forward to really intriguing investment challenges and finding solutions that work for our portfolios. Many of you have heard me drone on about the things we’re going to pin on our wall of worry. So forget about it. Know that the wall of worry is there and we’re paying attention to it. We might speculate on the direction of interest rates from time to time, or the push and pull of politics, but as you have heard me say many times, we’re not investing in the market, we’re investing in individual companies. As simple as it may sound, the relative valuation of the purchase price almost always decides whether or not, over time, you’ll have a profitable enterprise, a profitable investment. Now we’re going to shift over to Patrick and let him carry the news, illuminating some of our thoughts on current investments and the selections we have been making. Patrick Mason, CFP :: Investment AnalystIn last quarter’s newsletter we briefly touched on our prediction surrounding the potential market reaction to the U.S. presidential election. We were confident that changes don’t happen in a vacuum nor overnight, and so far that is turning out to be the case from a policy perspective. The initial investor enthusiasm surrounding the possibility of large infrastructure spending and tax reform has waned, as the reality of the sheer size of these projects proves to be more difficult to implement than originally thought. From an investment prospective, the slower pace of policy changes creates an interesting environment. The sectors and companies thought to be the biggest beneficiaries of potential policy changes are experiencing investor euphoria and a herd mentality, causing certain sectors to provide minimal appreciation potential at current prices. When much of the current market movement is based on high expectation, thoughtful and disciplined valuation analysis becomes even more important. On the bright side, this also creates opportunities to invest in select companies that have not been the recipients of investor euphoria. As always, we are focused on risk management and protecting against permanent loss of capital. It is easy to be enticed to shift focus to the short term in a market based on euphoric expectations; yet now, more than ever, is a time to focus on long-term opportunities to grow wealth. In this environment we will continue to find high quality companies at attractive prices, while selling companies that we believe have become overpriced. Thank you for your continued trust and support. Please call or stop by if you ever want to discuss anything in more detail. Patrick, thank you very much. Now we’ll shift to Tim in his other role here as Chief Compliance Officer. You may have heard on the news, or seen in the newspaper, that one of the big topics of this year is the word “Fiduciary.” Tim will give you a summary of how we embrace this, how it affects us as a firm and our thinking, and what benefit it has for you as our investors. Tim Mosier :: Principal and Chief Compliance OfficerYou may have heard about a new rule in the works from the Department of Labor known as the “DOL Fiduciary Rule.” This rule, proposed by the Department of Labor under the Obama administration, would require that Investment Advisors, Brokers, Insurance Agents, and anyone else providing investment advice for a fee or commission, must act in the best interest of the investor when dealing with certain retirement accounts, in financial terms, as a “Fiduciary.” At this point you might ask: “You mean they haven’t always acted in the investor’s best interest?” The answer is: maybe. The investment industry has many ways that it supports individual investors. Much of the industry, most easily identifiable as “brokers” who earn a commission on trades and insurance product sales, is held to a standard that says investments and advice must be “suitable” for the investor; not in the best interest, but suitable. This can mean that sometimes the advice is given biased towards the advisor’s interest rather than the investor’s. Another, smaller part of the investment industry consists of Registered Investment Advisers, (notice the “e” instead of an “o” in advisers) like Cairn Investment Group, who must, and always have, acted as Fiduciaries. The new rule would push much of the industry in our direction. It comes with new documentation requirements to help investors better understand the choices they face when rolling over or transferring retirement assets between accounts or custodians. Because we at Cairn have already accepted the mantle of a Fiduciary, the changes in our processes will be modest: new language in our advisory agreements, making it clearer that we are a fiduciary, and a cost comparison worksheet to help investors make better decisions. The brokerage firms that are not primarily in a Fiduciary model will be forced to make difficult choices regarding the services they provide and to whom. The new administration has delayed the enforcement date until mid-June, and there is indication that it may be withdrawn completely if the courts allow. It is our plan to fully comply with the new documentation requirements regardless. Thank you, Tim. We’ve had some changes at Cairn recently. All of them seem to be working out well. Number one, we took over a little more space in our building and have shifted some office spaces around. Patrick has settled into the old conference room, making it his office while the additional space has been remodeled into a new conference room – it’s pretty zippy. We’re still trying to figure out how to run the technology. I might resort to dragging in a tripod paper holder otherwise known as an easel and just write and draw the “old-fashioned” way. But the rest of the folks seem to be catching on quickly; we’re excited about the technology we’ve added, the space, and the way the office seems to flow. It’s good. Additionally, Brie, who was with us and so wonderful at so many things, resigned at the end of January. We have added a new terrific person. As a bit of an intro, I think that many of you will recognize and have some memories of Theresa Benjamin. Theresa worked with Dad and me at Charter Investment Group from 1992 – 1995, she then took what seems to be kind of a reasonable path, met a guy, got married, moved to a different state and, life being what it is, she’s back in the northwest and has rejoined us. Theresa is learning fast all the complexity and the care and feeding of our business. Thank you, Theresa, we’re happy to have you here. That being said, as our investors dial in to the office, it’s likely that Morgaine will be picking up the phone.
If you are near, don’t hesitate to swing by. We would love to have you come by the office and meet Theresa, and, as you know, the coffee pot (or in this case the espresso machine) is always raring to go. Thanks for your support. We look forward to a successful 2017. Happy Trails, Jim Parr, Principal 3/27/2017 :: Ticker: NVO :: Div. Yield: 3.26% :: Closing Price: $34.18COMPANY DESCRIPTIONHeadquartered in Denmark, Novo Nordisk is a global pharmaceutical company, leading in the production of insulin and providing services for those with diabetes, rare bleeding disorders, and obesity. Lars Fruergaard Jørgensen became Novo Nordisk’s CEO in 2017 after working in various positions in the company since 1991. COMPANY HIGHLIGHTS AND FINANCIALSNovo Nordisk is the result of a 1989 merge between two Danish insulin production companies, founded in the early 1920s. Novo Nordisk is a global leader in insulin production, with the goal of preventing, treating, and eventually curing diabetes. The company also provides services for hemophilia and other rare bleeding disorders. Novo Nordisk is distinct in its approach to diabetes and illness management in that the company creates initiatives which support underlying habits and causes of illness, rather than just symptom management. One such initiative, Cities Changing Diabetes, is a collaboration between the company and seven large cities. The goal is to understand the driving factors behind the rise of urban diabetes, share the results, and identify and implement solutions. Strong internal drug development enables the company to generate large amounts of cash (over $5 billion in free cash flow) that is used to reinvest back into the business, pay dividends, and repurchase shares at attractive prices. More recently, the company has boosted their research and development efforts to diversify their business outside of diabetes care.
VALUATION AND RISKSAs of the date of this report, Novo Nordisk is trading at a discount compared to historical valuations (20% below sales and 50% below cash flow multiples) and below fair value based on scenario analysis of free cash flow growth. Novo Nordisk has a dividend yield over 3% and generates over $5 billion in free cash flow allowing flexibility to continue raising their dividend over time. On a free cash flow basis, we expect them to grow cash flow at 5% annually over the next decade, below its current growth rate of 20% over the previous 10 years, due to higher pricing pressure on pharmaceuticals, increased competition and high revenue concentration. Modeling our conservative estimation places a price of $45 on shares which is almost a 28% premium based on current price. If our conservative assumption turn out to be overly optimistic, we still feel there is a margin of safety built into the current price based on the company’s high returns on capital (75%) and strong cash flow generation. Though considered the leader in the diabetes care market, Novo Nordisk operates in a highly competitive environment. Eli Lilly and Sanofi are their primary competitors. We would like to see management’s continued discipline in regards to capital allocation and research and development funding. Novo Nordisk’s diabetes and obesity care division accounts for roughly 80% of their revenue. Continued focus on competitive pressures within the U.S. and growth initiatives outside the U.S. will be monitored closely. Weighing the risks and rewards, we feel the substantial discount at which Novo Nordisk currently trades offers a good long-term opportunity. Cairn Investment Group and its affiliates (“Cairn”) produces Company Spotlight reports (“Reports”) for its clients and the general public. The Reports are impersonal and do not provide individualized advice or recommendations for any specific investor or portfolio. Investing involves substantial risk. Cairn makes no guarantee or other promise as to any results that may be obtained from using the Reports. Past performance should not be considered indicative of future performance. No reader should make any investment decision without first conducting his or her own research and due diligence. At various times Cairn may own, buy or sell the securities discussed for purposes of investment or trading. Cairn disclaims any and all liability in the event any information, commentary, analysis, opinions, advice and/or recommendations in the Reports prove to be inaccurate, incomplete or unreliable or result in any investment or other losses.
The Reports commentary, analysis, opinions, advice and recommendations represent the then current views of Cairn, and are subject to change at any time. The information provided in the Reports is obtained from sources the author believes to be reliable. However, the author has not independently verified or otherwise investigated all such information. This is not a solicitation or offer to buy or sell any securities. Cairn does not receive any compensation from any of the companies featured in the Reports. Any redistribution of the Reports or the information contained therein, without the written consent of Cairn is strictly prohibited. 3/13/2017 :: Ticker: ABB :: Div. Yield: 3.30% :: Closing Price: $22.64COMPANY DESCRIPTIONBased in Zurich, Switzerland, ABB Ltd is a Swedish-Swiss industrial technology company providing technological solutions for utility, industrial, transport, and infrastructure customers. ABB Ltd’s products (power drives and switches) enhance energy efficiency through the use of high end materials and technology. Ulrich Spiesshofer has been the President and CEO since 2013. He began with ABB Ltd in 2005. COMPANY HIGHLIGHTS AND FINANCIALSABB Ltd creates products, systems, and software that integrate with digital systems and equipment. The company organizes these solutions into four divisions: electrification products, robotics and motion, industrial automation, and power grids. ABB Ltd implements many of these solutions through partnerships with other companies and governmental departments. Recent partnerships include collaborations to implement electric bus and transit systems in several countries, a system to manage the entire lifecycle of energy generation (especially renewable), and R&D research for high-power electric charging stations. Much of ABB’s recent partnerships focus on sustainability and integrating renewable sources into existing systems. Within their robotics division ABB Ltd has started producing industrial robots in the U.S. (previously produced in Sweden and China) with the goal of having over 75% of all North American models made in the U.S.
VALUATION AND RISKSAs of the date of this report, ABB Ltd is trading at a slight discount compared to its historical valuations and below fair value based on our scenario analysis of free cash flow growth. ABB Ltd has a dividend yield of 3.3% and generates over $3 billion in free cash flow creating the flexibility to continue to raise the dividend over time. On a free cash flow basis, we expect ABB Ltd to grow cash flow at 4% annually over the next decade, which is also in line with its last 10 year growth rate. Modeling our conservative estimation places a price of $27.61 on shares, which is almost a 22% premium based on the current price. If our conservative assumptions turn out to be overly optimistic, we still feel there is a margin of safety built into the current price based on the company’s strong cash flow generation and dominant market presence. Though considered a leader in the power generation market, ABB Ltd operates in a highly competitive environment; Siemens is their primary competitor in this market. We would like to see management’s continued discipline in regard to capital allocation and cost efficiency. Their continued focus on competitive pressures within the U.S. and growth initiatives will be monitored closely. Weighing the risks and rewards, we feel ABB Ltd currently offers a good long-term opportunity. Cairn Investment Group and its affiliates (“Cairn”) produces Company Spotlight reports (“Reports”) for its clients and the general public. The Reports are impersonal and do not provide individualized advice or recommendations for any specific investor or portfolio. Investing involves substantial risk. Cairn makes no guarantee or other promise as to any results that may be obtained from using the Reports. Past performance should not be considered indicative of future performance. No reader should make any investment decision without first conducting his or her own research and due diligence. At various times Cairn may own, buy or sell the securities discussed for purposes of investment or trading. Cairn disclaims any and all liability in the event any information, commentary, analysis, opinions, advice and/or recommendations in the Reports prove to be inaccurate, incomplete or unreliable or result in any investment or other losses.
The Reports commentary, analysis, opinions, advice and recommendations represent the then current views of Cairn, and are subject to change at any time. The information provided in the Reports is obtained from sources the author believes to be reliable. However, the author has not independently verified or otherwise investigated all such information. This is not a solicitation or offer to buy or sell any securities. Cairn does not receive any compensation from any of the companies featured in the Reports. Any redistribution of the Reports or the information contained therein, without the written consent of Cairn is strictly prohibited. 11/22/2016 :: Ticker: FLO :: Div. Yield: 3.77% :: Closing Price: $16.18COMPANY DESCRIPTIONHeadquartered in Thomasville, GA, Flowers Foods is one of the largest producers of packaged bakery foods in the U.S., operating over 39 bakeries that market fresh baked breads, tortillas, and snack cakes for retail and food service customers. Allen Shiver became the CEO in 2013 and has been with the company since 1995. COMPANY HIGHLIGHTS AND FINANCIALSFounded in 1919, Flowers Foods is a national baked goods company producing fresh breads, buns, rolls, tortillas, and snack cakes. Flowers Foods operates two business segments: direct-store-delivery and warehouse delivery. The direct-store-delivery operates over 30 bakeries that include the brands Nature’s Own, Dave’s Killer Bread, Wonder, and Tastykake. The warehouse segment is responsible for national distribution of breads sold directly to customers’ warehouses. Through a combination of organic growth and strategic acquisitions, Flowers Foods has grown their geographic market from 38% to 85% of the U.S. population since 2003. Nature’s Own is America’s #1 selling bread and Dave’s Killer Bread (acquired in 2015) is the #1 organic bread brand in the country. These two brands, combined with Flowers Foods’ other offerings give them a strong competitive advantage in the baked goods industry. Flowers Foods operating performance has been very consistent over the last decade. Operating and cash flow margins have averaged mid to high single digits. This combined with prudent capital allocation decisions, has allowed Flowers Foods to generate high returns on capital, averaging 12.5% over the last 10 years.
VALUATION AND RISKSFlowers Foods is trading at attractive valuations compared to their historical operating performance and peer group. As of the date of this report, Flowers Foods traded over a 25% discount to their historical sales and cash flow multiples. Based on numerous free cash flow growth assumptions, we assume an overall compound annual growth rate (CAGR) in free cash flow of 6% over the next 10 years. This blended growth rate assumption is well below the growth rate achieved historically. This reflects conservative assumptions based on the growth in organic breads and the overall sales growth rate of the business being lower than the previous ten years. If our conservative estimates turn out to be overly optimistic, we feel there is a margin of safety built into current prices. Flowers Foods operates in a highly competitive environment, with input costs (i.e. food inflation), and changing consumer tastes having a potential effect on the profits. Flowers Foods also has litigation risk associated with class action lawsuits from delivery independent contractors. Risk factors will be monitored, but at current valuations combined with the company’s financial strength, we feel the risks are represented in the current price and that future growth potential remains strong. Cairn Investment Group and its affiliates (“Cairn”) produces Company Spotlight reports (“Reports”) for its clients and the general public. The Reports are impersonal and do not provide individualized advice or recommendations for any specific investor or portfolio. Investing involves substantial risk. Cairn makes no guarantee or other promise as to any results that may be obtained from using the Reports. Past performance should not be considered indicative of future performance. No reader should make any investment decision without first conducting his or her own research and due diligence. At various times Cairn may own, buy or sell the securities discussed for purposes of investment or trading. Cairn disclaims any and all liability in the event any information, commentary, analysis, opinions, advice and/or recommendations in the Reports prove to be inaccurate, incomplete or unreliable or result in any investment or other losses.
The Reports commentary, analysis, opinions, advice and recommendations represent the then current views of Cairn, and are subject to change at any time. The information provided in the Reports is obtained from sources the author believes to be reliable. However, the author has not independently verified or otherwise investigated all such information. This is not a solicitation or offer to buy or sell any securities. Cairn does not receive any compensation from any of the companies featured in the Reports. Any redistribution of the Reports or the information contained therein, without the written consent of Cairn is strictly prohibited. 9/30/2016 :: Ticker: GILD :: Div. Yield: 2.35% :: Closing Price: $79.12COMPANY DESCRIPTIONHeadquartered in Foster City, CA, Gilead is a biopharmaceutical research and development company. The company specializes in the development of infectious disease pharmaceuticals with an emphasis on HIV and hepatitis C. Dr. John Milligan is the company’s CEO and has been with the company over 25 years. COMPANY HIGHLIGHTS AND FINANCIALSGilead is a leader in infectious disease pharmaceutical research and development with an emphasis on HIV and hepatitis C once-daily, single-tablet treatments. The company’s HIV drugs make it possible for infected patients to live a normal life with very few side effects. In 2011, Gilead purchased Pharmasset for $11 billion dollars which added hepatitis C treatment to their portfolio. This acquisition has paid huge dividends as the two drugs they develop for hepatitis C, Sovaldi and Harvoni, have now produced annual revenues of over $20 billion dollars. Together, Gilead represents approximately 80% of HIV treatments and 60% of hepatitis C treatments worldwide. Strong internal drug development and fortuitous acquisitions have enabled the company to generate large amounts of cash ($16 billion in free cash flow) that is used to reinvest back into the business, pay dividends, and repurchase shares at attractive prices. More recently, the company has been expanding its oncology and immunology franchise, which could help spur future growth when combined with their current development portfolio.
VALUATION AND RISKSGILD is trading at a discount compared to historical valuations (over -60% below sales and cash flow multiples) and below fair value based on scenario analysis of free cash flow growth. GILD has a dividend yield of 2.40% and generates over $16 billion in free cash flow to give them the flexibility to continue to raise their dividend over time. On a free cash flow basis, we expect the company to grow cash flow at 1% annually over the next decade, below its current growth rate of 30% over the previous 10 years, due to higher pricing pressure on pharmaceuticals, increased competition and high revenue concentration. Modeling our conservative estimation places a price of $106 on shares which is almost a 36% premium based on current price. If our conservative assumptions turn out to still be overly optimistic, we still feel there is a margin of safety built into the current price based on the company’s high returns on capital and strong cash flow generation. Though considered a leader in the HIV and hepatitis C markets, the company operates in a highly competitive environment (Merck and Abbvie). We would like to see continued discipline in regards to capital allocation, research and development and acquisition spending. Continued focus on the company’s revenue breakdown, integration among its recent acquisitions, and continued growth in their drug pipeline will be areas to monitor closely. Weighing the risks and rewards, we feel the substantial discount at which the company currently trades offers a good long-term opportunity. Cairn Investment Group and its affiliates (“Cairn”) produces Company Spotlight reports (“Reports”) for its clients and the general public. The Reports are impersonal and do not provide individualized advice or recommendations for any specific investor or portfolio. Investing involves substantial risk. Cairn makes no guarantee or other promise as to any results that may be obtained from using the Reports. Past performance should not be considered indicative of future performance. No reader should make any investment decision without first conducting his or her own research and due diligence. At various times Cairn may own, buy or sell the securities discussed for purposes of investment or trading. Cairn disclaims any and all liability in the event any information, commentary, analysis, opinions, advice and/or recommendations in the Reports prove to be inaccurate, incomplete or unreliable or result in any investment or other losses. The Reports commentary, analysis, opinions, advice and recommendations represent the then current views of Cairn, and are subject to change at any time. The information provided in the Reports is obtained from sources the author believes to be reliable. However, the author has not independently verified or otherwise investigated all such information. This is not a solicitation or offer to buy or sell any securities. Cairn does not receive any compensation from any of the companies featured in the Reports. Any redistribution of the Reports or the information contained therein, without the written consent of Cairn is strictly prohibited.
9/12/2016 :: Ticker: ABC :: Div. Yield: 1.56% :: Closing Price: $86.95COMPANY DESCRIPTIONHeadquartered in Chesterbrook, PA, AmerisourceBergen is a pharmaceutical distribution and services company. The company provides its services to healthcare providers, pharmacies, and pharmaceutical manufactures. Steve Collins is the company’s CEO and has been with the company over 20 years. COMPANY HIGHLIGHTS AND FINANCIALSAmerisourceBergen is one of three major pharmaceutical distributors in the U.S (McKesson, Cardinal Health). The high barriers to entry in this space allow AmerisourceBergen to produce consistent and stable operating results. In recent years the company has acquired specialty companies to further margin expansion and growth (MWI Veterinary). The company’s strong supply chain management allows them to generate significant cash flows even in a low margin business. They have historically used their cash efficiently to strategically buy back shares and increase their dividend. Revenue and profits should remain relatively stable over time as the company has recently extended their exclusive relationship with Walgreens (WBA) until 2026 (WBA owns 25% of AmerisourceBergen). The firm has been aggressive in expanding its presence in generic drug distribution and specialty drugs (Oncology). Both of these areas offer higher margins than branded and non-specialty drugs. Also, the recent acquisition of MWI Veterinary was built around the growing pet health and industrial animal health care market as they distribute more than 50,000 products across the U.S. The company has a history of consistent operating performance, high returns on capital (15%) and strong cash flow generation. This has allowed the company flexibility as they are able to fund growth initiatives without over relying on debt.
VALUATION AND RISKSAmerisourceBergen is trading at a discount compared to its historical valuations and below fair value based on scenario analysis of free cash flow growth. AmerisourceBergen has a dividend yield of 1.60% and generates over $2 billion in free cash flow to give them the flexibility to continue to raise their dividend over time. On a free cash flow basis, we expect the company to grow cash flow at 2% annually over the next decade, below its current growth rate of 18% over the previous 10 years, due to higher pricing pressure on pharmaceuticals and high revenue concentration. Modeling our conservative assumption places a price of $108 on shares which is almost a 27% premium based on the price as of the date of this report. If our conservative assumptions turn out to still be overly optimistic, we still feel there is a margin of safety built into the current price based on the company’s high returns on capital and strong cash flow generation. Though there are only two main competitors in the pharmaceutical distribution business, AmerisourceBergen operates in a highly competitive environment. We would like to see continued discipline in regards to capital spending and renewed contracts with Express Scripps. Continued focus on the company’s revenue breakdown, along with integration among its recent acquisitions will be areas to monitor closely. Based on weighing the potential rewards and risks we are optimistic that AmerisourceBergen will be a good long-term investment. Cairn Investment Group and its affiliates (“Cairn”) produces Company Spotlight reports (“Reports”) for its clients and the general public. The Reports are impersonal and do not provide individualized advice or recommendations for any specific investor or portfolio. Investing involves substantial risk. Cairn makes no guarantee or other promise as to any results that may be obtained from using the Reports. Past performance should not be considered indicative of future performance. No reader should make any investment decision without first conducting his or her own research and due diligence. At various times Cairn may own, buy or sell the securities discussed for purposes of investment or trading. Cairn disclaims any and all liability in the event any information, commentary, analysis, opinions, advice and/or recommendations in the Reports prove to be inaccurate, incomplete or unreliable or result in any investment or other losses.
The Reports commentary, analysis, opinions, advice and recommendations represent the then current views of Cairn, and are subject to change at any time. The information provided in the Reports is obtained from sources the author believes to be reliable. However, the author has not independently verified or otherwise investigated all such information. This is not a solicitation or offer to buy or sell any securities. Cairn does not receive any compensation from any of the companies featured in the Reports. Any redistribution of the Reports or the information contained therein, without the written consent of Cairn is strictly prohibited. |