McKesson's Many Growth Catalysts

6/28/2010


  Recent Price
$68
  Dividend
$0.72
  Yield

1.1%

  P/E Ratio
15
  Shares (millions)
275
  Long-Term Debt as % of Capital
23%
  52-Week Price Range
$71.49 - $42.61

Medical distributor McKesson ($68; MCK), leveraged to an aging population, is poised to add millions of customers with new insurance coverage through health-care reform legislation. McKesson focuses on drugs and surgical supplies but also sells computer hardware and software designed to improve patient care.

In fiscal 2010 ended March, per-share cash flow from operations jumped 75% to $8.48. The company holds $3.73 billion in cash — $13.57 per share — versus $2.29 billion in long-term debt. In May, McKesson hiked its dividend 50% and announced plans for another $1 billion in share buybacks, calming the jitters of investors who feared the company would pursue a big acquisition.

McKesson shares have surged 16% since the end of February, versus 4% for the average health-care distributor in the S&P 1500 Index. Earnings estimates for McKesson’s fiscal 2011 and 2012 ending March are climbing, and no major contracts are slated to renew this year. McKesson is a Buy and a Long-Term Buy.

Business breakdown

Operating in all 50 states, McKesson supplies half of all U.S. hospitals and many independent and chain pharmacies. The distribution segment (97% of revenue in fiscal 2010) distributes health and beauty products, with 91% of revenue in the U.S. and the rest in Canada.

Pharmaceuticals account for 97% of the segment’s total revenue. Distribution contracts with drugmakers tend to be fee-based, making McKesson’s compensation highly predictable. McKesson sells both generic and branded drugs, the former poised to benefit from a series of expiring patents for blockbuster drugs. Increased use of generics should boost McKesson’s profit margins.

In both the U.S. and Canada, McKesson is the largest pharmaceutical distributor. McKesson controls more of the distribution market for U.S. chain pharmacies than rivals AmerisourceBergen ($32; ABC) and Cardinal Health ($35; CAH) combined. In Canada, McKesson holds 42% of the $18.6 billion retail market and 27% of the $2.4 billion hospital market. McKesson distinguishes itself from competitors through its broad product mix, providing a one-stop shopping experience.

McKesson uses cash flow from the distribution business to fund its booming technology segment. The unit offers automated medication-dispensing systems, consulting and outsourcing services, and supply-chain and strategy management. A potential beneficiary of stimulus spending, the technology segment has begun booking orders for electronic health-record systems. The technology business generates high margins, accounting for just 3% of total revenue but 26% of gross profits.

Attractive valuation

At 15 times trailing earnings, McKesson trades at a 13% discount to its five-year average P/E ratio. The stock also looks cheap relative to the average health-care distributor as measured by price/earnings, price/sales, and price/cash flow ratios. An annual report for McKesson Corp. is available at 1 Post St., San Francisco, CA 94104; (800) 826-9360; www.mckesson.com.

McKESSON
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Mar '10 $1.26 vs. $1.23 + 2% $66.98 -

$57.23

15 - 13
Dec '09 1.19 vs. 1.05 + 4% 64.98 - 55.82 15 - 13
Sep '09 1.07 vs. 1.17 + 2% 59.95 - 42.61 13 - 9
Jun '09 1.06 vs.

0.83

+ 0% 45.27 - 33.13 11 - 8
           
Year
(Mar.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2010 $108.70 $4.58 $0.48 $66.98
-
$33.13 15 - 7
2009 $106.63 $4.28 $0.48 60.45
-
28.27 14 - 7
2008 $101.70 $3.43 $0.24 68.43
-
51.08 20 - 15
2007 $92.98 $2.89 $0.24 59.53
-
44.60 21 - 15
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
88 56 78 87 48 78 75

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


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