You might not have heard of Herbert Stein, but if you're an investor you'll want to take heed of his eponymous law. Stein's Law states: "If something cannot go on forever, it will stop."
McKesson Corporation (NYSE:MCK) shareholders would be wise to keep Stein's Law in mind these days. The stock is up around 20% year to date and has soared over 120% over the last two years. Can this momentum go on forever? It's unlikely -- at least not at that pace.
So what will stop the upward trend for McKesson? Here are three reasons the stock could fall.
1. Investors take the money and run
It's surely tempting for investors who bought McKesson a couple of years or more ago to think about taking profits. The stock's valuation could increase that temptation.
McKesson's price-to-earnings multiple of 36 hovers very close to its highest point in the last 10 years. It's not the only pharmaceutical distributor with relatively high earnings multiples: rivals AmerisourceBergen and Cardinal Health sport P/E values of 40 and 75, respectively.
Investors probably wouldn't have a hard time convincing themselves that there's no better time to take the money and run than now. The reality is that if enough current McKesson shareholders adopt that mindset, shares will drop.
2. Margins slip away
Strong earnings growth can fuel the fire behind a hot stock. In McKesson's case, though, the trend isn't one of impressive earnings growth.
McKesson makes its money from two primary business segments -- distribution solutions and technology solutions. The distribution business generated 98% of the company's total revenue in the last fiscal year, but only 81% of profit. Meanwhile, technology solutions brought in only 2% of McKesson's revenue last year, but accounted for nearly 19% of profit.
That's changing, though. In the most recent quarter, technology only contributed 8% of total profit. McKesson's business mix is shifting more toward distribution -- to the detriment of profit margins. It might take a while for earnings growth to catch up with the stock's rapid rise.
3. Acquisition blues
Earlier this year, McKesson made a big move into the international pharmaceutical distribution business with its acquisition of Celesio. The Germany-based company supplies products to over 65,000 pharmacies in 14 countries and operates 2,188 retail pharmacies. Buying Celesio seems like a good move for McKesson, but what if that assumption proves incorrect?
While McKesson's earnings growth isn't spectacular, it looks great in comparison to Celesio's -- which experienced a year-over-year drop in profits during the first half of 2014. One problem spot for Celesio is its Brazilian operations, where below-average growth is expected.
Synergies in the $275 million-$325 million range are expected from the acquisition, but they won't be realized fully until 2017. It doesn't seem too much of a stretch to suspect that continued sluggishness from Celesio could be a drag on McKesson's bottom-line results -- and its stock.
The long run
Any of these three factors could cause McKesson's stock to fall. There are other potential troublemakers as well, especially a downturn in the overall market.
Stein's Law is something investors should also keep in mind over the long run. Any pullback for McKesson can only continue for a finite period. Overall, my view is that the likelihood of the stock going up during the coming years outweighs the prospects of McKesson's shares languishing for an extended period.
McKesson maintains a significant presence in the healthcare industry. One out of every three medications in the U.S. is distributed by the company. McKesson counts over half of U.S. hospitals and one-fifth of doctors as customers. Chances are that you could fall asleep and wake up 20 years later to find that McKesson is still a major player in the healthcare market.
Stocks like that tend to be good ones for investors.
Keith Speights has no position in any stocks mentioned. The Motley Fool recommends 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.