MCKESSON CORP. $87 (New York symbol MCK; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 246.1 million; Market cap: $21.4 billion; Price-to-sales ratio: 0.2; Dividend yield: 0.9%; TSINetwork Rating: Above Average; 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 45.2%, from $881 million in 2007 to $1.3 billion in 2011. Because of fewer shares outstanding, earnings per share shot up 68.2%, from $2.89 in 2007 to $4.86 in 2011.

Small division earns big profits

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.

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. McKesson paid $200 million for US Oncology, and assumed $1.9 billion of its debt.

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.

Lots of room for more purchases

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%.

Contract renewal seems likely

McKesson has been the sole supplier of drugs to the U.S. Department of Veterans Affairs for eight years. This deal, which expires soon, accounts for 5% of its earnings. The company is facing strong competition for this business. However, its experience working with this agency gives it a good chance of winning an extension.

McKesson will probably earn $6.05 a share in fiscal 2012. The stock trades at a reasonable 14.4 times that estimate.

McKesson is a buy.