Investments In RCA And OneOncology Will Expand Specialty Pharma Leadership And Global Reach

Key Takeaways

• Strategic acquisitions and investments expand leadership in specialty pharmaceuticals, enhancing revenue through new services and high-growth market reach.
  
• Efficiency advancements and customer-centric strategies improve profitability and strengthen relationships, supporting future revenue growth through retention and service expansion.
  
• Increased GLP-1 sales and lower COVID-19 vaccine sales pressure margins, while market challenges and currency fluctuations risk impacting future revenue and earnings growth.

Catalysts

Cencora, Inc. sources and distributes pharmaceutical products in the United States and internationally.

• The acquisition of Retina Consultants of America (RCA), a leading retina MSO, and the investment in OneOncology are expected to expand Cencora's leadership in the specialty pharmaceutical segment, driving higher growth in a pharmaceutical-centric market. This should positively impact revenue and earnings due to potential new service offerings and expanded market reach in high-growth segments.
  
• Advancements in efficiency and productivity through the implementation of advanced technology and collaboration across global teams are expected to streamline operations and optimize business processes. This initiative should enhance net margins and profitability by reducing costs and increasing operational scalability.
  
• Execution of a customer-centric mindset by collaborating and innovating with customers across the supply chain is expected to build strong customer relationships and enhance customer satisfaction. This strategic approach could drive future revenue growth through increased customer retention and expansion of services.
  
• The continued growth in GLP-1 products and overall market and volume growth in the U.S. Healthcare Solutions segment has resulted in strong revenue performance. Although GLP-1 growth is expected to decelerate, the overall segment performance remains robust, positively influencing future revenue outlook and operating income.
  
• A focus on expanding international operations with a strategic approach to pharmaceutical distribution and specialty logistics in the European market may drive future growth. With distinct market structure opportunities, the company can capitalize on local expertise and global infrastructure, enhancing both revenue and net margins.

Cencora Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cencora's revenue will grow by 7.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.5% today to 0.8% in 3 years time.
• Analysts expect earnings to reach $2.9 billion (and earnings per share of $16.49) by about March 2028, up from $1.4 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $2.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.2x on those 2028 earnings, down from 37.3x today. This future PE is lower than the current PE for the US Healthcare industry at 24.0x.
• Analysts expect the number of shares outstanding to decline by 2.77% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Cencora Future Earnings Per Share Growth

Risks

• The increased sales of low-margin GLP-1 products, combined with lower sales of commercial COVID-19 vaccines and a lack of sales of exclusive COVID-19 therapies, have negatively impacted Cencora's gross profit margin, which could challenge net margins.
  
• The global specialty logistics business faced challenges due to subdued clinical trial activity, and although improvement is expected later in fiscal 2025, continued market softness could impact earnings.
  
• The recent acquisition of RCA (Retina Consultants of America) requires near-term cash allocation for deleveraging and might strain financials if integrations do not proceed as planned, potentially affecting future earnings growth.
  
• Cencora's reliance on strong prescription utilization trends and continued GLP-1 growth presents a risk if market conditions change, which could impact revenue and results in future quarters.
  
• The international segment faces challenges due to foreign currency fluctuations, which have already led to a downward revision in revenue growth expectations, posing a risk to future revenue consistency.

Valuation

• The analysts have a consensus price target of $279.689 for Cencora based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $308.0, and the most bearish reporting a price target of just $242.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $376.4 billion, earnings will come to $2.9 billion, and it would be trading on a PE ratio of 20.2x, assuming you use a discount rate of 6.2%.
• Given the current share price of $268.48, the analyst price target of $279.69 is 4.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.