Is It Time to Buy McKesson Corporation Stock?

Shares of this healthcare juggernaut are soaring. Should McKesson be on your investing short list?

Aug 26, 2014 at 6:20PM

If you live in North America, there's a one in three chance that a medication you use was distributed by one company -- McKesson Corporation (NYSE:MCK). Over half of the hospitals in the U.S. do business with the giant health services company. One-fifth of all physicians use technology or services provided by McKesson.

Mckesson Headquarters Sign

Source: McKesson Corporation 

Juggernaut isn't a word that can be applied to any company. However, in the world of healthcare, the term definitely applies to McKesson. With many healthcare stocks sizzling, is it time to take a look at buying McKesson stock?  

You might think that the train has already left the station when it comes to investing in McKesson. The stock has more than doubled over the last two years. Shares are up nearly 20% so far this year -- well above its key rivals Amerisource Bergen, Cardinal Health, and Owens & Minor

MCK Chart

MCK data by YCharts

With its stock soaring, McKesson's valuation has also vaulted to seemingly lofty levels. The stock trades at a trailing price-to-earnings multiple near its 10-year high. When you look at McKesson's paltry profit margins of less than 1%, you might wonder how much farther this stock can actually run.

Then there's the fact that the company's most profitable line of business has lost some steam. Over the last three years, McKesson's technology solutions business segment generated only around 2% of total revenue -- but 18%-21% of total gross profit. However, McKesson sold off its international technology and hospital automation business units this year. As of last quarter, technology solutions only contributed a little over 8% of total gross profit.  

...or just warming up?
On the other hand, an argument could be made that McKesson is simply following the "hedgehog principle" laid out by management guru Jim Collins in his business best-seller "Good to Great". Collins maintained that great companies focus mainly on one thing and do it better than anyone else.

McKesson already ranked as the No. 1 pharmaceutical distributor in North America. The acquisition earlier this year of Celesio helps position the company to gain a larger presence globally. Celesio, based in Frankfurt, Germany, supplies pharmaceutical products to 65,000 pharmacies and hospitals across 14 countries.

The pharmaceutical distribution business typically benefits when more generic drugs are available. McKesson's financial results have certainly been helped in recent years from selling generic drugs. The company expects the rest of this year and into 2015 to bring an increase in the number of branded to generic drug conversions. While there are always some risks related to reimbursement and pricing, this should mean good news for McKesson in the coming months.

Last month already brought some good news for the company. McKesson announced a three-year extension of its distribution agreement with CVS Caremark on July 30. That's no trivial deal: CVS is McKesson's largest customer and makes up 16% of its total revenue. 

With the CVS extension secured and Celesio kicking in additional international business, McKesson upped its full-year earnings guidance by $0.10 per share. The company's management doesn't seem to think a cooling-off is in store. 

Taking the temperature
Is it a good idea to consider buying McKesson stock or should investors take a pass? It's not too late to still gain good returns. However, don't be surprised if a pullback occurs along the way from profit-taking or disruptive macroeconomic factors. Over the long run, though, this appears to be a solid candidate to be a part of investors' broader investment portfolio.

McKesson CEO John Hammergren stated last year that "no other company in America has the combined footprint that we do in pharmacy and in technology." He was right then -- and still is now.

Hammergren also noted that the next decade will bring tremendous opportunities for healthcare organizations to win by improving quality and reducing costs. He's right again. I suspect that McKesson will be one of those winners.

Another huge health care winner
The best biotech investors consistently reap gigantic profits by recognizing true potential earlier and more accurately than anyone else. Let me cut right to the chase. There is a product in development that will revolutionize not just how we treat a common chronic illness, but potentially the entire health industry. Analysts are already licking their chops at the sales potential. In order to outsmart Wall Street and realize multi-bagger returns you will need The Motley Fool's new free report on the dream-team responsible for this game-changing blockbuster. CLICK HERE NOW.

Keith Speights has no position in any stocks mentioned. The Motley Fool recommends CVS Caremark and McKesson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers