3 Reasons We're Fans of McKesson (MCK)

What a fantastic six months it’s been for McKesson. Shares of the company have skyrocketed 42.9%, setting a new 52-week high of $988.29. This performance may have investors wondering how to approach the situation.

Is now still a good time to buy MCK? Or is this a case of a company fueled by heightened investor enthusiasm? Find out in our full research report, it’s free.

Why Are We Positive On McKesson?

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

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, McKesson grew its sales at a decent 10.9% compounded annual growth rate. 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 $398 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 an astounding 18% compounded annual growth rate over the last five years, higher than its 10.9% 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 McKesson is a high-quality business worth owning, and with the recent surge, the stock trades at 22.5× forward P/E (or $988.29 per share). Is now a good time to buy despite the apparent froth? See for yourself in our full research report, it’s free.

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