Bergen Brunswig Rebound Seems Likely
Investors who bought into Bergen Brunswig Corp. last year when it was trading at its 1986 high of more than $37 a share certainly have little to crow about now that the American Exchange-listed stock closed Friday at $24.625 a share.
But Wall Street analysts who follow the Orange-based distributor say that Bergen Brunswig appears to be on the verge of an earnings recovery that could push its stock price back into the mid-30s within the next 12 months.
Bergen Brunswig’s fiscal 1986, which ended last August, was a big disappointment. Bergen Brunswig, which acquired four other companies for an aggregate of $105 million, reported an 11% drop in net earnings to $20.7 million from $23.3 million a year earlier.
During the company’s fiscal 1987--already more than half complete--net earnings will be off, too.
The fiscal 1987 estimates range from a low of $1.25 predicted by Joel Liffmann, of Drexel Burnham Lambert Inc., to a high of $1.40 offered by Mark Felder, of Baltimore-based Legg Mason Wood Walker Inc. Based on the nearly 13.3 million shares currently outstanding, that translates into net earnings of between $16.6 million and $18.6 million.
George Reinhardt, Bergen Brunswig’s chief financial officer, said that while the $1.40-a-share estimate seems a little high, company officials “have little to quarrel with” concerning the $1.25-a-share estimate.
Although earnings have been soft, sales have been strong. During its fiscal 1986, Bergen Brunswig’s revenues increased 26% to $3.06 billion; and during the fiscal first half ended Feb 28, it increased 11% to $1.68 billion.
Now in the midst of consolidating its operations, Bergen Brunswig is engineering an earnings turnaround, the analysts say.
This year the company will open a new 200,000-square-foot automated distribution facility in Valencia that will allow it to close three smaller warehouses scattered throughout Southern California. Reinhardt said the new facility should deliver between $2.5 million and $3 million a year in savings.
Moreover, because of this year’s changes in federal tax law, Bergen Brunswig’s tax rate is expected to fall to 42% in 1988 from the current 50%, Reinhardt said. By 1989, he said, the company’s tax rate will drop to 41%.
Tax and Overhead Savings
As a result of tax and overhead savings, analysts predict that Bergen Brunswig will earn $2 a share during its fiscal 1988. Indeed, says Felder of Legg Mason Wood Walker, the company’s fiscal 1988 earnings could top $2.20 a share.
Reinhardt, however, said $2.20 a share could be somewhat optimistic. He prefers the $1.90 predicted by Drexel Burnham’s Liffmann, or the $2 a share estimate offered by John McRae of Bear Stearns & Co.
Because of the anticipated strong 1988 results, the three analysts agree that short of a major market correction, Bergen Brunswig’s stock price is poised to recoup its losses of the last year.
“We think that over the next 12 months . . . the stock should be able to approach its old high of around $33 to $35 a share,” said McRae, of Bear Stearns, who has been recommending the issue for about three months.
Like other analysts, McRae said that the chief risk in Bergen Brunswig stock right now is the danger of a major market correction. However, the stock probably would not trade for anything less than $21 to $22 a share at the worst, he said.
An additional risk is the danger that Bergen Brunswig’s earnings recovery could prove illusory, said Liffmann, of Drexel Burnham. A couple of bad quarters now, he said, could erode investor confidence in the stock.
Liffmann, however, says the odds of that happening are pretty remote. “I wouldn’t be recommending the stock if I thought the risk outweighed the reward,” he said.
