McKesson Can Deliver Growth

7/16/2012


  Recent Price
$93
  Dividend
$0.80
  Yield
0.9%
  P/E Ratio
15
  Shares (millions)
249
  52-Week Price Range
$96.02 - $66.61

Logistics rarely gets investors excited. Yet the mundane business of distribution has brought McKesson ($93; MCK) uncommon success. Annual revenue above $122 billion makes medical distributor McKesson the largest health-care services company in the U.S., and per-share-profits have risen at an annualized rate of 15% over the last decade.

Driven by a mix of acquisitions, new business, and aggressive cost cuts, McKesson has managed at least 8% sales growth and 14% higher operating profits per share in each of the last five quarters. The consensus projects profit growth of 13% in the fiscal year ending in March 2013, and McKesson has topped quarterly profit estimates by an average of $0.07 per share over the last five years. The stock is a Buy and a Long-Term Buy.

What McKesson does

McKesson's distribution business (97% of sales, 86% of operating profits in the year ended March) provides drugs, medical supplies and equipment, and other products to retail stores and medical facilities. In April, McKesson renewed a drug-supply contract with the Veterans Administration that should generate more than $31 billion in sales over eight years. McKesson distinguishes itself from its peers through its breadth of services; the ability to distribute both drugs and supplies represents a competitive advantage. McKesson says it supplies 50% of U.S. hospitals and 77% of those with at least 200 beds.

Technology solutions (3% of sales, 14% of profits) provides software, automation, and consulting services for pharmacies and health-care institutions. Increasing interest in electronic medical records should drive growth in coming years.

Reasons for optimism

Rising profitability: As with most distribution companies, McKesson's profit margins seem low — in the year ended March, operating margins before depreciation were below 2.4%. But margins have been trending higher for eight years, and the most recent margin is the widest in at least 15 years.

Generic trends: The increasing popularity of generic drugs, which generate higher margins for McKesson, should help keep margins rising. Several big-selling drugs — most notably Pfizer's ($22; PFE) cholesterol fighter Lipitor — went off patent in 2010 or 2011. And generics should become even more prevalent. Five blockbusters with a combined $16 billion in annual revenue have either lost patent protection this year or should by the end of the year, and one report projects $290 billion in drug sales at risk because of patent expirations through 2018.

Valuation: While McKesson isn't cheap relative to its own history, at 13 times estimated earnings for the fiscal year ending March 2013, the shares trade 13% below the peer-group median. McKesson seems cheap relative to its growth potential.

Buybacks: The company has spent more than $7 billion on share buybacks over the last six years, reducing the share count by 21% during that period. Strong operating cash flow should support continued buybacks.

An annual report for McKesson Corp. can be obtained at 1 Post St., San Francisco, CA 94104, 415-983-8300, www.mckesson.com.

MCKESSON
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Mar '12
2.09
vs.
1.78
+ 10%
88.91
-
74.89
15 - 12
Dec '11
1.40
vs.
1.28
+ 9%
85.70
-
66.61
14 - 11
Sep '11
1.63
vs.
1.10
+ 10%
84.96
-
70.86
16 - 13
Jun '11
1.27
vs.
1.16
+ 9%
87.32
-
77.55
16 - 15
           
Year
(Mar.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2012
122.73
6.38
0.78
88.91
-
74.89
14 - 10
2011
112.08
5.31
0.66
85.70
-
66.61
15 - 11
2010
108.70
4.58
0.48
84.96
-
70.86
15 - 7
2009
106.63
4.07
0.42
87.32
-
77.55
15 - 7
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
92
72
66
84
30
87
79

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.
   NM Not Meaningful.


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