1 Pharma Firm with Wide Economic Moat

You may not have heard of Cencora, but it’s well worth your time getting to know this pharma company that provides medicines and other supplies to hospitals and retail pharmacies.

This isn’t your ordinary health supplier but also offers software services to manage the supplies it distributes. Other strings to its bow include data analysis and clinical trials.

Further, the company offers special shipping services for the drug industry. Now if I told you it was originally called AmerisourceBergen Corporation, you might be more familiar with it, but even if not, let’s dive in to see what makes this healthcare firm so special.

Cencora Flies Under the Radar

One thing we really like about Cencora is it largely flies low under investors radars. You don’t hear a whole lot about the firm, and yet it’s up 14% for the year, modestly outperforming the market.

If we expand the time horizon a bit further, though, Cencora is up over 102% during the past five years versus 57% for the S&P 500. That kind of relative outperformance signals something good is happening under the surface, so what is it?

Examining the last decade of annual returns provides a glimpse into what investors are rewarding. The company has generated steadily rising revenues each and every year without exception, with sales rising from $87.9 billion in 2013 to $238 billion in the most recent fiscal year.

During that period, operating income has increased from just shy of $1 billion annually to about $2.7 billion, which in turn is adding to the pile of cash on the balance sheet, which presently sits at $3.3 billion.

It must be said, however, that debt has increased commensurate with the cash increases. Long-term debt over the past decade has risen from $1.3 billion to $6.7 billion.

Solid financials are one thing but what else is attracting institutional investors?

Is Cencora Stock Undervalued?

The robust financials have translated to a stock that appears to make for a compelling investment opportunity. Cencora is undervalued by 18.5% according to a discounted cash flow analysis that places fair value at $222 per share.

Analysts seem to agree with that assessment and have a consensus price target of $207 per share, further reinforcing the view that COR stock is trading below its intrinsic value. The stock is widely covered by 13 analysts, too, so investors can have confidence in the consensus given the large sample set of researchers.

On the low end, the most pessimistic analyst doesn’t expect the share price to fall below $162 per share while the most optimistic has a high price target of $225 in place.

Does Cencora Pay A Dividend?

If you’re a dividend-seeking investor, you may be wondering whether Cencora, with its enormous top line in the hundreds of billions, shares any of the spoils with shareholders in the form of a dividend, and the answer is yes, albeit a modest one.

Cencora’s dividend yield currently is just 1.03% but that shouldn’t deter investors from considering it because what really counts is the total return and, not only has Cencora delivered on that front with its share price doubling over the past five years but it pays a modest dividend along the way too.

Add to that the payout ratio of just 23.49% and it’s clear this is a company with ample room to increase its dividend over the coming years. What’s more, the company has a proven track record of so doing with an 18 year growth streak already in the books.

Cencora Share Buyback & Moat

We are not the only ones excited by the state of the financials and the company’s track record of steady growth. The Board of Cencora appears to agree with both analysts and a discounted cash flow forecast that the share price does not fully reflect fair value and announced a share repurchase scheme.

Amid all the good news it might be easy to miss one of the company’s key and outstanding metrics, its return on invested capital, or ROIC. Cencora’s ROIC stands at an astonishing 25.3% at the moment, leaving the sector average far in the rearview mirror.

For context, a 10% return on invested capital wouldn’t be bad at all, but when you see a company deliver north of 20%, it suggests a wide economic moat has formed. One astonishing fact that cements the company’s sustainable competitive advantage, or moat, is that it distributes over one third of all pharmaceuticals in the US.

Cencora has a vast distribution network that includes hospitals, pharmacies, and even animal healthcare providers that, combined, creates a high barrier for rivals. Even well-funded competitors would struggle to emulate Cencora’s distribution model.

From the data we could track down, Cencora serves more than 2,500 acute care hospitals and over tens of thousands of retail pharmacies, which results in economies of scale and further widens its moat.

The company’s partnerships are also a big reason it can’t be disrupted easily. For example, Walgreens Boots Alliance and Cencora signed a long-term distribution agreement that extends their relationship to 2029.

Wrap-Up

Cencora is not simply a pharmaceutical products distributor but is also a service provider that offers pharmacy management, consulting, and data analytics. The combined services offered by the firm serve to bolt on revenue streams that adds diversification and a more integrated offering that appeals to customers.

By selling pharmacy management software solutions to thousands of locations, for instance, the company adds a layer to its economic moat that produces a return on invested capital so high it is the envy of even software firms.

Add to that a steadily growing top line, a bottom line consistently in the black, and a compelling valuation and you end up with a stock that has all the elements of a long-term winner.

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.