Over the past six months, McKesson’s shares (currently trading at $763.33) have posted a disappointing 8.1% loss, well below the S&P 500’s 6.8% gain. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Given the weaker price action, is now an opportune time to buy MCK? Find out in our full research report, it’s free.
Why Is MCK a Good Business?
With roots dating back to 1833, making it one of America's oldest continuously operating businesses, McKesson (NYSE: MCK) is a healthcare services company that distributes pharmaceuticals, medical supplies, and provides technology solutions to pharmacies, hospitals, and healthcare providers.
1. Long-Term Revenue Growth Shows Momentum
A company’s long-term performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Luckily, McKesson’s sales grew at a decent 11.1% compounded annual growth rate over the last five years. Its growth was slightly above the average healthcare company and shows its offerings resonate with customers.
2. Economies of Scale Give It Negotiating Leverage with Suppliers
Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.
With $403.4 billion in revenue over the past 12 months, McKesson is one of the most scaled enterprises in healthcare. This is particularly important because healthcare distribution & related services companies are volume-driven businesses due to their low margins.
3. Outstanding Long-Term EPS Growth
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
McKesson’s EPS grew at 17.9% compounded annual growth rate over the last five years, higher than its 11.1% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.
Final Judgment
These are just a few reasons why we’re bullish on McKesson. After the recent drawdown, the stock trades at 17.2× forward P/E (or $763.33 per share). Is now a good time to buy? See for yourself in our full research report, it’s free.
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