McKesson Is McCheap

| About: McKesson Corporation (MCK)

By Justin Dove

When the market falls as a whole, it creates buying opportunities. One such opportunity that’s presenting itself is McKesson Corp. (NYSE:MCK). The drug distribution company reported a positive first quarter of FY2012 on July 28. Despite the good news, fear in the market is bringing down McKesson’s stock with it.

Marc Lichtenfeld mentioned a solid year ahead for the stock in January. The stock has lived up to expectation, gaining as much as 16 percent since January. It has outpaced the S&P 500 by more than 12 percent over the past 52 weeks. However, problems in the market have all but erased the gains McKesson notched earlier this year.

Why McKesson’s Best Days Are Ahead

Marc predicted a stronger second half of 2011 for McKesson. Admittedly it may be hard to beat a 16 percent gain by December with the current state of the market. But here are some reasons to believe the best days are ahead:

  • McKesson reported $30 billion in revenues for the period ending June 30. That’s a nine percent gain in revenues for Q1 of FY2012. The nine percent gain was offset by a 13 percent rise in operating expenses for a four percent drop in net income. Most of this increase in operating expenses was from a recent acquisition of U.S. Oncology. Debt incurred from the $2.2 billion acquisition last winter will also weigh on earnings in the short-term, but expect this partnership to work out for McKesson in the long-run.
  • McKesson expects 2012 earnings to range between $6.09 and $6.29 per share, an increase of 10 cents per share. The reason for the increase is a decrease in the expected tax rate. According to the company, the tax rate paid is fluid based on sources of income. GAAP earnings per share for Q1 increased by 3 percent and beat the Thomson Reuters estimate by 17 cents per share. Traditionally the company performs best towards the end of the fiscal year. This will especially be the case as the patent-cliff approaches.
  • Many analysts are very high on McKesson. Zacks Investment Research rates McKesson as an “outperform.” It cites the aging population and increased use of generics as main contributors. Citigroup gives the stock a price target of $89 and Auriga Analysts believes the stock will reach $95. Further, options traders are seemingly bullish on McKesson. Options volume increased to six times greater than normal with the same multiple of calls over puts.

McKesson Positioned for Continued Growth

McKesson is positioned to continue growing. The baby-boomers are getting older and more of the population will need medication. McKesson is the undisputed industry leader, handling one third of all drugs distributed in North America. It's also the largest healthcare IT company, “with software and hardware technology installed in more than half of the nation’s hospitals with greater than 200 beds.”

Such advantages should keep business steady for years to come. The company also looks like it has a solid short-term ahead. With the patent-cliff approaching, its generic drug distribution will spike along with earnings by next March. Don’t expect the dip to last long.

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