Macro Wrap – $MCK One of the Less Flashy Leaders of Bull Market

by Enis October 24, 2013 8:27 am • Commentary

McKesson is one of the least discussed $30 billion+ market cap companies in the world.  It is making headlines today after a strong earnings beat and raise on top of a $5 billion dollar purchase of the rest of Celesio, a German drug distributor.

The company has two main businesses in the health care arena – Drug Distribution and Technology Solutions.  Interestingly, MCK also has one of the most sparse Quarterly Reports that I’ve read, with very little management discussion on the details of its businesses aside from simple financial figures.  This was just about the whole discussion from last quarter (this quarter is also sparse):

Direct distribution and services revenues increased primarily due to market growth, which includes growing drug utilization and price increases, expanded volume with existing customers and new customers. These increases were partially offset by price deflation associated with brand to generic drug conversions.
Sales to customers’ warehouses decreased primarily due to a shift of revenues to direct distribution and services, including a customer transition, and loss of a customer.
Canadian pharmaceutical distribution and services revenues increased for the first quarter of 2014 compared to the same period a year ago. Excluding an unfavorable foreign currency exchange rate fluctuation of 1%, Canadian revenues increased 3% primarily due to market growth, a new customer and one additional sales day, partially offset by government imposed price reduction for generic pharmaceuticals in certain provinces.
Medical-Surgical distribution and services revenues increased primarily due to our acquisition of PSS World Medical and market growth.
Technology Solutions revenues increased primarily due to a small business acquisition, higher volume of claims processing and more sales and installation of our software products.

The stock has been a big bull market winner since its 2009 low, and has been especially strong over the past year (it is up more than 50% based on pre-market trading).  The weekly chart shows that the stock has hardly had a correction in the past few years:

Weekly chart of MCK, Courtesy of Bloomberg
Weekly chart of MCK, Courtesy of Bloomberg

MCK is typical of the less flashy leaders of this bull market – a staid, global healthcare company with steady earnings growth whose stock has appreciated off a cheap valuation after the financial crisis.  McKesson has grown earnings each year over the past 10 years, with its lowest growth rate of 1% year-over-year in 2009, and its highest growth rate of 32%   in 2011.

The stock’s P/E multiple has expanded, now near its highest level in the past 10 years:

Trailing 12 month P/E in MCK, Courtesy of Bloomberg
Trailing 12 month P/E in MCK, Courtesy of Bloomberg

Given this valuation, a similar stock appreciation to 2013 in future years is quite unlikely over for MCK.  But on a relative basis to other stocks in the market, MCK is a 20 P/E name expected to grow earnings at 10% per year – not super rich.  While I don’t expect similarly large stock gains going forward, this is a solid business.  The company’s market positioning and increased bargaining power as it grows places it on a path to continued market outperformance going forward.