UBS Sees PharMerica As A 'Show-Me' Story, Downgrades To Neutral

UBS’ A.J. Rice downgraded the rating for PharMerica Corporation PMC from Buy to Neutral, while reducing the price target from $40 to $22. He expects 2016 to be a transitional year for the company.

While announcing its 2016 guidance, management cited a number of headwinds:

1. Continued bed losses in the first half of the year
2. Pressure on gross margins from the AMP rule implementation
3. Pressure on volumes in the core LTC business
4. Reimbursement headwinds related to Part D contract negotiations

Management also indicated that recently signed new contracts offer PharMerica a more stable trajectory for 2017 and 2018. “While we agree the signing of long-term contracts can provide enhanced visibility on out-year growth, we think PMC could well be a 'show-me' story in 2016,” analyst A.J. Rice wrote.

Estimate Changes

The EPS estimates for 2016, 2017 and 2018 have been reduced from $2.30 to $1.99, from $2.70 to $2.24 and from $3.10 to $2.44, respectively. The company may generate some margin improvement from trimming costs and incremental benefit from the new contracts, Rice added.