A Stock with Enormous Scale and Competitive Advantage: McKesson Corporation (NYSE:MCK)

July 28, 2016

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President and CIO Christopher Tsai of Tsai Capital Corporation says McKesson Corporation (NYSE:MCK) stock is down from a high of $240, but the company’s scale and competitive advantage are what keeps him interested from an investment standpoint.

McKesson is based in San Francisco. It’s been headed by John Hammergren since 2001. McKesson is the largest wholesaler of prescription drugs by revenue. The company is also the second-largest specialty pharmaceutical distributor in the United States. It’s about a $41 billion market cap. The stock sells for about $178 a share, and it’s down from a high of about $240. So that’s interesting to us.

So why is it down? It’s down largely because the market is concerned that payers will continue to curb the growth of drug spending, and there will be less of a tailwind from the generic side. But we think that the company’s enormous scale provides significant bargaining power and that these concerns are already reflected in the stock price. The stock is selling for about 12.7 times forward earnings. And this multiple is about 7% below its historical average for a business that continues to grow very well.

McKesson certainly has the kind of competitive advantage that we look for. It should continue to grow EPS at a low-double-digit rate and continue to produce high rates of return on equity and capital. And also, I’d like to note that McKesson produces strong free cash flow, which can be used for a larger share repurchase program or for acquisitions, both of which we have not included in our assumptions and in our EPS estimates, which call for about $14 in earnings per share over the next 12 months.

Christopher Tsai