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AmerisourceBergen (ABC) - Get Free Report is often overlooked as the middle-man in the pharmaceutical industry. The company is one of the largest drug wholesalers in North America, which is a business that carries razor- thin gross margins of only 4%. But what Amerisource lacks in profitability, it makes up for in volume, posting north of $66 billion of revenue last year.

The stock was upgraded Wednesday from Neutral to Buy at Merrill Lynch. The analyst cited the company's low valuation and solid price increases in branded drug pricing for the call. Still, Wall Street has a relatively cool outlook for the shares, with just four out of 13 analysts surveyed by Bloomberg rating AmerisourceBergen a Buy.

At Wednesday's closing price of $38.53, the stock is trading at 12 times expected fiscal 2009 (ending September) earnings of $3.21 This represents a 28% discount to the company's historical average valuation over the past decade, and marks the lowest multiple the stock has received in three years.With that in mind, I'm here to answer readers' questions: Should you buy it? Does AmerisourceBergen have the cure for investors' woes in this volatile environment?

The Right Active Ingredients

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The company posted better-than-expected third-quarter results July 24. AmerisourceBergen earned 73 cents a share, which was 7 cents ahead of the consensus analyst estimate. Revenue grew 14.5% year-over-year to $17.51 billion, coming up $120 million less than expected. Still, management is expecting its third straight annual double-digit earnings gain in fiscal 2009.

In addition to improved industry pricing, AmerisourceBergen is achieving this growth by cutting costs. The company is also in the process of selling its workers' compensation division (PMSI), which had been a drag on earnings.

That said, AmerisourceBergen does risk losing some business if

CVS Caremark

(CVS) - Get Free Report

is successful in its bid for

Longs Drug Stores

( LDG). AmerisourceBergen is the primary distributor for Longs (about $2 billion of annual revenue), while competitor


(CAH) - Get Free Report

is the chief supplier for CVS. The current contract with Longs is only guaranteed through mid-2009, at which point, CVS is expected to renegotiate its existing deal with Cardinal.

In the meantime, it's worth noting that management finds value in the shares, as evidenced by the company's active buyback program. AmerisourceBergen has repurchased $554 million of its own shares in the first three quarters of fiscal 2008, exceeding its budget for the entire year.

I agree with management that the stock offers an attractive value at current levels. AmerisourceBergen has been overlooked by the market, even though the company delivers consistent earnings growth in a volatile environment. Management competes with larger players in the space by keeping its costs low, and I believe the stock can trade back up toward the mid-$40's over the coming quarters.

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David Peltier is a research associate at In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback;

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