Yesterday, we discussed U.S. drug store chain Walgreen, a name familiar to many Canadian investors. Today we examine a U.S. drug distributor that has a strong and growing Canadian presence, but is not as well known. We first included this stock in the Aggressive Growth portfolio of Wall Street Stock Forecaster in June, 2002.
McKesson Corp. (New York symbol MCK; www.mckesson.com) is the largest wholesale drug distributor in the U.S. and Canada. It also owns 49% of Mexico’s largest drug distributor.
McKesson’s customers include 40,000 pharmacies, as well as doctor’s offices, hospitals and clinics. The company also supplies surgical tools and health and beauty products.
McKesson’s revenue rose 20.6%, from $93.0 billion in 2007 to $112.1 billion in 2011 (fiscal years end March 31). Earnings jumped 49.4%, from $881 million in 2007 to $1.3 billion in 2011. Because of fewer shares outstanding, earnings per share shot up 73.0%, from $2.89 in 2007 to $5.00 in 2011.
A big part of the company’s growth comes from its technology solutions division, which makes computers and software that help pharmacies and clinics manage their drug inventories. This division accounts for just 3% of McKesson’s revenue, but supplies close to 25% of its earnings.
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Growth stocks: McKesson makes Canadian acquisition, has room for more
Acquisitions have also fuelled McKesson’s earnings. In December 2010, it bought US Oncology, a privately held firm that sells drugs and provides research and administrative services to over 500 cancer care facilities in the U.S.
In January 2012, McKesson agreed to pay $920 million (Canadian) for Drug Trading Company Limited, which buys drugs on behalf of 850 independently owned pharmacies in Canada. McKesson already distributes products to these customers; that familiarity cuts the risk of this purchase. The deal should close in mid-2012.
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The company’s capital expenditures are low, and it spends less than 1% of its revenue on research. That gives McKesson plenty of flexibility to keep making acquisitions. It also holds cash of $4.2 billion, or $17.03 a share, and its long-term debt is just $3.6 billion, or 17% of its market cap.
In addition to acquisitions, McKesson is using its cash to buy back shares. It recently added $650 million to its share repurchase authorization. It can now buy back up to $1.5 billion of its stock. There is no time limit to these purchases. The company is also likely to raise its dividend again this year. The current annual rate of $0.80 a share yields 0.9%.
McKesson will probably earn $6.05 a share in fiscal 2012. The stock trades at a reasonable 14.6 times that estimate.
In the latest edition of Wall Street Stock Forecaster, we look at whether McKesson can continue to increase its earnings in the face of stiff competition to renew its contract as sole supplier of drugs to the U.S. Department of Veterans Affairs. We conclude with our clear buy-hold-sell advice on the stock.
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