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With the healthcare sector historically well-shielded against past economic downturns, we wanted to highlight pharmaceutical distribution giant AmerisourceBergen (ABC), which most recently stood at #37 on our Value Leaders rankings. ABC is among the three titans within the pharmaceutical distribution space, the other two being McKesson (MCK) and Cardinal Health (CAH), which are also on our Value Leaders rankings.

• Demand inelasticity is a reason behind health care typically performing decently during economic troughs. Individuals will always require medical services, and a change in price tends to have little material effect on the change in demand. Pharmaceutical distributors' role as the middle-man in the supply of prescription drugs at a retail shop such as Walgreens (WBA) -- ABC's largest customer at 27% of FY22 (Sep) sales -- allows companies like ABC to particularly see low seasonality and demand elasticity.
• ABC enjoys a fairly large economic moat, as it is one of three organizations supplying virtually all prescription drugs in the U.S. This provides ABC with the capacity to deal with potential future government regulations, bolster its international operations, and maintain its pricing power.
  • These attributes were showcased earlier this month through solid Q2 (Mar) numbers. Revenue growth remained steady, expanding 9.9% yr/yr to $63.46 bln. ABC has yet to register a yr/yr decline in sales in over five years. In fact, during the 2008-2009 financial crisis, ABC only saw one quarter where revs fell yr/yr. Also, during the debt ceiling crisis in July 2011, shares edged only modestly lower.
  • International sales may have ticked 0.2% lower yr/yr, but on a currency-neutral basis, they jumped 12%. ABC also raised its as-reported FY23 revenue outlook for this business to a 3% decline to flat from a 1-5% decline.
  • ABC also raised its consolidated FY23 forecasts, targeting adjusted EPS of $11.70-11.90 and revenue growth of +6-8% yr/yr.
• The population is also aging, with the number of individuals 65 and older to exceed 66 mln by 2026, making it the fastest-growing segment of the U.S. population. Therefore, even though pharmacy distribution via mail is becoming more popular, allowing consumers to no longer have to enter physical retail chains, the population segment that uses the most prescription drugs will likely avoid the e-commerce solution and continue utilizing physical locations.
• Generic pharmaceuticals are margin boosters for distributors, unlike biotech firms which rely on patents to maintain a competitive position. Although generic drug availability will continue to increase as patents expire, potentially putting pressure on prices, ABC believes the increased use of generics will have a net favorable effect on its top-line growth, as volume should help offset falling prices. Also, since generics already account for around 90% of total prescription volume in the U.S., this adverse impact should not be very significant.

Overall, with the healthcare sector offering solid defense characteristics in the event of worsening economic conditions, we view ABC, which boasts a strong foothold in the pharmaceutical distribution industry, competing primarily with just two other firms, as a good choice. Also, its valuation has remained attractive over the past three years, trading around 12-14x forward earnings. Furthermore, unlike MCK, which recently skyrocketed on upbeat MarQ earnings, it is not looking too overbought. Moreover, it has not endured similar struggles as CAH over the past few years.