The analysts at Lazard Capital continue to believe that underlying fundamentals for the top companies in the drug channel (distributors, retailers, etc.) remain sound. Prescription use has picked up over the past six months, but overall utilization remains modest. With respect to the stocks they cover, while overall volume is a consideration, the mix is more important. Generic volume continues to rise, representing a positive trend from a profit standpoint for the retailers, distributors and pharmacy benefit management companies.

The Lazard team analyzed prescription drug data from a variety of sources, including IMS Health, Medi-Span, Bureau of Labor Statistics and retail pharmacies. Using this data, they attempt to gain better insight to trends and most importantly sales. Here are the top health care distribution stocks to buy from Lazard Capital.

AmerisourceBergen Corp. (NYSE: ABC) is the world’s largest pharmaceutical distributor and trades at just 16 times forward earnings per share (EPS) estimates. It recently completed the divestiture of its Canadian distribution business to Kohl & Frisch, the country’s only Canadian-owned national full-line pharmaceutical distributor. Lazard has a $64 price target for the stock, the highest on Wall Street. The Thomson/First Call estimate is at $61. Investors are paid a 1.5% dividend.

McKesson Corp. (NYSE: MCK) delivers pharmaceuticals, medical supplies and health care information technologies to the health care industry primarily in the United States. In Lazard’s view, McKesson’s operations and underlying fundamentals are as strong as any in the business, such that shares warrant at least a similar multiple to the group average. Their price target for the stock is $130, while consensus is at $123.50. Investors receive small 0.8% dividend.

CVS Caremark Corp. (NYSE: CVS) is a leading pharmacy drugstore chain with more than 7,500 stores across the United States and revenues of over $123 billion in 2012 after several acquisitions and consolidation in the pharmacy drugstore business. Having a large network of stores across the country helps CVS Caremark in capturing a higher market share than its competitors. The company filled 718 million prescriptions in 2012, which accounted for more than 20% of the total written in the United States. Lazard’s target price for the stock is $67, and consensus is posted at $65. Shareholders are paid a 1.5% dividend.

Express Scripts Holding Company Inc. (NASDAQ: ESRX) is one of the top portfolio names in Leon Cooperman’s Omega Fund. The most recent reporting data showed the fund owns 2.7 million shares. Earnings per share are expected to come in at $4.30 this year, which would place the pharmacy benefit management company at a current-year P/E of 14. Wall Street analysts expect small increases in earnings after that, so Express Scripts could be a value play. Lazard has a $71 price target, while the consensus target is at $67.

The branded and generic pharmaceutical business has strong tailwinds from population aging and growth. Investors would be smart to keep a portion of their portfolio dollars directed at this consistently growing and profitable sector. Like we have recommended, it may be wise to buy half positions now, and see if a summer sell-off doesn’t provide a better entry point for the balance.

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