COR Financial Analysis

Analysis Date: 2/6/2025

Business Model

Cencora operates through two reportable segments: U.S. Healthcare Solutions and International Healthcare Solutions. Revenue is generated from the distribution of pharmaceuticals and healthcare products, along with value-added services for pharmaceutical manufacturers and healthcare providers.

Revenue Sources

• U.S. Healthcare Solutions: Distribution of pharmaceuticals and healthcare products in the U.S., including specialty products, sales to physician practices and health systems, and animal health products.
• International Healthcare Solutions: Distribution of pharmaceuticals and healthcare products internationally, primarily in Europe, and global specialty logistics services (World Courier).

Income Statement Analysis

• Revenue increased by 12.8% year-over-year, driven by a 13.6% increase in U.S. Healthcare Solutions, indicating strong market demand and volume growth, especially in GLP-1 class products and specialty products. (Pro)
• Gross profit increased by 3.6%, but gross profit margin decreased by 28 basis points to 3.14%. This margin compression is attributed to increased sales of lower-margin GLP-1 products and decreased sales of higher-margin COVID-19 related products. (Con)
• Operating expenses increased significantly by 12.5%, primarily due to a substantial increase in litigation and opioid-related expenses compared to a credit in the prior year. This increase offset some of the revenue growth benefits. (Con)
• Operating income decreased by 14.2% due to the rise in operating expenses outpacing gross profit growth. Operating income margin also declined significantly from 1.14% to 0.87%. (Con)
• Interest expense, net, decreased by 31.1% due to higher interest income from increased cash balances and higher interest rates, partially offset by increased interest expense from new debt for RCA acquisition and seasonal borrowings. (Pro)
• Net income attributable to Cencora, Inc. decreased by 18.8%, reflecting the pressure from increased operating expenses and other losses, despite revenue growth. (Con)

Balance Sheet Analysis

• Cash and Cash Equivalents increased by 2.9%, indicating a slightly improved liquidity position. (Pro)
• Accounts Receivable and Inventories both increased, by 2.8% and 7.9% respectively, in line with revenue growth, suggesting efficient working capital management. (Neutral)
• Short-term debt significantly increased by 284%, likely due to seasonal working capital needs and financing for the RCA acquisition, increasing short-term financial obligations. (Con)
• Long-term debt increased substantially by 55.7%, primarily to finance the acquisition of Retina Consultants of America (RCA), increasing long-term leverage. (Con)
• Goodwill and Other Intangible Assets decreased slightly by 3.4%, potentially due to amortization or adjustments. (Neutral)
• Total Equity decreased significantly by 54%, largely due to increased debt financing and potentially share repurchases, indicating a shift in the capital structure towards more debt. (Con)

Capital Allocation

Cencora declared a quarterly cash dividend of $0.55 per common share, indicating a commitment to returning value to shareholders through dividends. The company also engaged in share repurchases of $385.47 million in Q1 2025, similar to the previous year, signaling ongoing share buyback programs. A significant portion of capital was allocated to acquisitions, notably RCA, as evidenced by increased long-term debt. Reinvestment in business is implied through sustained capital expenditures and strategic acquisitions to expand specialty services and market presence. Management mentioned prioritizing deleveraging after the RCA acquisition, which suggests a potential shift in capital allocation towards debt reduction in the near term.

Management Commentary

Sencore delivered a strong start to our fiscal year with revenue growth of 13% and adjusted EPS growth of 14%.

due to the strength and execution in our U. S. Business, we are raising guidance for the fiscal year.

RCA is a leading retina MSO differentiated by its leadership team, clinical excellence, premier physician partner practices and positioning at the forefront of retina innovation through its clinical research capabilities.

Consolidated gross profit margin was 3.11%, a decrease of 20 basis points, driven by the continued increase in sales of low margin GLP-one products combined with lower sales of commercial COVID-nineteen vaccines and a lack of sales of exclusive COVID-nineteen therapies

International Healthcare Solutions operating income was $182,000,000 down 3% on an as reported basis and up 3% on a constant currency basis. In the quarter, lower operating income at our global specialty logistics business was partially offset by better results at our European distribution business.

we expect the second quarter to be the lowest growth quarter in fiscal twenty twenty five with adjusted diluted EPS growth in the mid single digits.

Overall Sentiment: Positive to Neutral. Management is optimistic about the start of fiscal year 2025, highlighting strong revenue and EPS growth and raising guidance. They are enthusiastic about the RCA acquisition and its strategic fit. However, there are concerns regarding gross margin compression due to product mix, challenges in the international specialty logistics business, and an expected lower growth in the next quarter. Overall sentiment leans towards positive due to raised guidance and strategic acquisitions, but with acknowledgment of margin and international segment headwinds.

Recommendation

Rating: Hold

Reason for Rating: Hold recommendation is appropriate given the mixed financial performance and outlook. Strong revenue growth and raised EPS guidance are positives, but margin compression, increased operating expenses, and negative operating cash flow in Q1 are concerns. The RCA acquisition is strategically positive but increases debt. Near-term headwinds in margin and international segment balance out the positives. Further monitoring is needed to assess margin trends, integration of RCA, and cash flow improvement throughout the fiscal year.

Disclaimer: This report is for informational purposes only and not investment advice. The analysis is based on limited information and subject to change. Investing in securities involves risks, including potential loss of principal. Past performance doesn't guarantee future results. Always conduct your own research, understand the risks, and consult a financial professional before making investment decisions.

Generated on: 2/6/2025, 6:30:21 AM