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By Jeremy Glaser | 12-10-2010 06:00 AM

Four Corporate Bond Picks With Upside Potential

Morningstar's credit research team makes the case for health care, retail, and racetrack credits.

Jeremy Glaser: For Morningstar.com, I'm Jeremy Glaser.

It's Ideas Week and here with the best credit ideas in corporate credit are credit analysts Joscelyn MacKay and Julie Stralow.

Thanks for joining me today.

Julie Stralow: No problems, thanks for having us.

Glaser: So, Julie, first off, what do you have for us today?

Stralow: Well, I have two bond ideas. One is from AmerisourceBergen and one is from Medco. So, they are both A-rated credits. We like the business quality, and we think they line up pretty well against each other, but also within our niche, they look like really good relative value plays.

Glaser: Can you talk to us a little bit about what those companies do?

Stralow: Sure. AmerisourceBergen and Medco are both in kind of the back-end. They don't produce drugs, and they are not pharmacies. So, that's not where the end users are going. They work in the middle, between those two different suppliers and customers. And so, basically, AmerisourceBergen is a drug distributor, and it works with a variety of different drugmakers and repackages and manages inventory for them, before going off to the thousands of pharmacies across the United States that they service.

Medco is a pharmacy benefit manager, and Medco is considered the thought leader in this business, and they are also the market share leader. And what they do is they really focus on trying to keep costs lower, particularly for pharmaceutical drugs, and so they are really trying to work with their end users, which – their customers are mainly large employers and managed care organizations, and so they use all their members and employees of those organizations, and they try to make sure that they are using the right sort of drug. If there's a generic available, they want them to go on the generic. If there is a lower-price branded drug, they want to go there, and also they want to use lowest way to get the drugs, so that could be the retail pharmacy or their own proprietary mail order business. So, we like both of these businesses, they are both narrow moats, and we think their credit qualities are both at A, which is low risk.

Glaser: So, they have that low risk. Do you think that the competitive advantages between the two of them are going to stay stable over time?

Stralow: We actually think that Medco has a positive moat trend, while AmerisourceBergen actually has a negative moat trend. So when we are looking at both of those in between, I think we favor Medco just a little bit more than we would favor AmerisourceBergen. But in terms of bond picks, we think that they both look pretty good right now.

Glaser: What particular bonds of both these companies do you think investors should take a look at?

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