Analysts' Choice: McKesson Bigger Than You Think

7/25/2016


  Recent Price
$198
  Dividend
$1.12
  Yield
0.6%
  P/E Ratio
16
  Shares (millions)
229
  Long-Term Debt As % Of Capital
39%
  52-Week Price Range
$235.23 - $148.29

McKesson ($198; MCK) supplies drugs, medical supplies, and equipment to retail stores and medical facilities. It generated nearly $191 billion in sales last year, fifth-highest among S&P 500 Index companies — and nearly $50 billion more than its closest industry rival. That massive scale allows McKesson to extract deep discounts for its customers, effectively creating an economic moat.

Softness in generic-drug prices has created some headwinds for McKesson. The company is also one of the biggest wholesalers and retail-pharmacy operators in the U.K., adding some risk from the U.K.'s vote to leave the European Union. Europe accounts for about 15% of McKesson's sales.

But drug demand should remain healthy, considering aging baby boomers and increased access to health care through the Affordable Care Act. The stock also looks cheap, trading at 16 times trailing earnings, a 19% discount to its five-year average and 21% below the industry median. McKesson, ranking above 90 for both sector-specific scores, is a Long-Term Buy.

Growing the right way

Despite its massive size, McKesson continues to generate solid growth. For fiscal 2016 ended March, McKesson grew earnings per share 15%, sales 7%, and cash from operations 18%.

McKesson has delivered that growth the right way, eschewing big, splashy takeovers in favor of smaller deals. Recent acquisitions have focused on boosting McKesson's presence in Europe and Canada, while also expanding oncology-related services in the U.S. None of the deals in the past five years cost more than $4.5 billion, and most were below $1 billion.

This strategy has paid off. McKesson's return on equity stands at its highest level since 1994, and operating profit margin has moved higher in each of the last 10 years, a period when several rivals saw profitability steadily shrink.

In a rare move to downsize its business, McKesson plans to slice off its technology unit (1.5% of sales, 13% of operating profit) to form a joint venture with Change Healthcare. McKesson will own a 70% of the new company, expected to later go public.

McKesson relied on CVS Health ($97; CVS) for 20% of sales last year. Other key customers include Wal-Mart Stores ($74; WMT), Rite Aid ($7; RAD), the U.S. Department of Veterans Affairs, and regional pharmacies. In May, McKesson formed a pact with Wal-Mart to supply all of the retailer's U.S. generic drugs. But it may lose Rite Aid, a customer of more than 15 years, after the retail drug chain is acquired by Walgreens Boots Alliance ($83; WBA). McKesson expects Rite Aid to account for about 6% of fiscal 2017 sales but has not said whether their relationship will extend beyond this year.

Conclusion

Analyst estimates have risen since management increased its full-year guidance last month. For the June quarter, McKesson is expected to report per-share earnings of $3.33, implying 6% growth, on sales of $50 billion, also up 6%. The company will announce results on July 27.

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

MCKESSON
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Mar '16
3.17
vs.
2.94
4%
196.84
-
148.29
16 - 12
Dec '15
3.18
vs.
2.89
3%
202.20
-
169.00
16 - 14
Sep '15
3.31
vs.
2.79
10%
236.86
-
160.10
20 - 14
Jun '15
3.14
vs.
2.49
9%
243.61
-
219.51
22 - 20
           
Year
(Mar.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2016
190.88
12.80
1.04
243.61
-
148.29
19 - 12
2015
179.05
11.11
0.96
232.69
-
162.90
21 - 15
2014
137.61
8.35
0.84
188.02
-
102.68
23 - 12
2013
122.46
6.33
0.80
111.55
-
84.65
18 - 13
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
96
81
75
87
35
98
64

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.


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