AmerisourceBergen: Logistics Moat with Best-in-Class Cash Conversion

Arvind Mallik and Jonathon Fite presented their in-depth investment thesis on AmerisourceBergen (NYSE: ABC) at Wide-Moat Investing Summit 2017.

AmerisourceBergen is a high-quality pharma distribution business trading well below a market multiple. The company has a strong balance sheet and competitive moat, underpinned by best-in-class logistics, working capital management, and regulatory barriers to entry. While the industry landscape is cluttered with complicated payment relationships, ~94% of all drug shipments are processed through pharma wholesalers and distributors like AmerisourceBergen. Macro forces provide strong tailwinds, as baby boomers enter peak drug consumption years, dispensed prescriptions continue to rise steadily, prescriptions comprise a larger mix of overall health spending, and overall health spending continues to rise even as volume shifts to cheaper generics. The pharma distribution arena is dominated by ABC, MCK, and CAH. Arvind and Jonathon sees operational, financial, and macro catalysts driving an increase in EPS at AmerisourceBergen from an estimated $5.85 in 2017 to $9-10 in 2020. Key catalysts include Walgreens deal expansion, distribution center buildout completion, renegotiation of inflationary contracts, share repurchases, accretive acquisitions using strong borrowing capacity, and a tax rate decline from 32% to 25%.

About the instructors:

Arvind Mallik is a Managing Partner of KMF Investments, a pure Pay-for-Performance Private Investment Partnership based in Denton, Texas. KMF seeks long-term capital appreciation by investing in companies whose intrinsic value is significantly higher than the market price. Over its 8 years of operations, KMF has found opportunities in world dominating franchises, hard assets below replacement costs, businesses at large discounts to liquidation value, and firms with beneficial exposure to rising interest rates. Prior to founding KMF Investments, Mr. Mallik was a Senior Manager in the Strategy practice of Accenture. At Accenture, he helped global companies formulate and execute strategies to enter new markets, develop innovative new services and solutions, and reduce their operating costs to improve shareholder returns. Mr. Mallik obtained a BS in Chemical Engineering and BS in Bioengineering from UC Berkeley, and an MS in Chemical Engineering from MIT. He graduated with highest honors from both institutions.

Jonathon Fite is a Managing Partner of KMF Investments, a pure Pay-for-Performance Private Investment Partnership based in Denton, Texas.KMF seeks long-term capital appreciation by investing in companies whose intrinsic value is significantly higher than the market price. Over its 8 years of operations, KMF has found opportunities in world dominating franchises, hard assets below replacement costs, businesses at large discounts to liquidation value, and firms with beneficial exposure to rising interest rates.Prior to founding KMF Investments, Mr. Fite was a Senior Manager in the Strategy practice of Accenture, where he helped companies improve shareholders returns. He is also an Adjunct Professor for the College of Business at the University of North Texas. Mr. Fite graduated with honors from the University of Arkansas with a BS and MS in Industrial Engineering.