The entire healthcare complex has registered shape declines throughout 2015 and thus far into 2016, this is particularly true for McKesson (TICKER: MCK). This sharp decline coincided with heated political debates aimed at the collective healthcare and more specifically biotech related companies. As candidates spoke to legislative actions geared towards reining in the costs of drugs, these actions negatively impacted healthcare and biotech stocks. The political posturing aimed at drug pricing are now largely priced into many healthcare related. I contend that after the recent sell-off, MCK looks very attractive at these levels. Once the political debates subside in 2016, healthcare stocks will likely benefit from the mere absence of these political headwinds. McKesson has now hit a multi-year low and boasts a P/E of 16 and a PEG of 1.5. McKesson appears very attractive and presents a unique buying opportunity considering its EPS growth, dividend payout, acquisitive nature and share buyback program.
McKesson hits a multi-year low
McKesson has fallen sharply from a high of $243 to a multi-year low of $148 as of mid-February (Figure 1). The stock currently trades at price-to-earnings multiple of only 16 and factoring in its estimated EPS growth rate of roughly 14%, the PEG is at 1.5. McKesson has consistently delivered earnings that have beat analyst estimates over the previous 3 quarterly earnings reports (Figure 2). McKesson currently has a weighted analyst rating of 8.8 with all ratings at hold through buy (Figure 3). In addition to beating estimates, the dividend payout has just been increased to $0.28 per share on a quarterly basis while its payout ratio is only 12% (Figure 3). This leaves plenty of room for dividend growth, share buybacks and acquisitions. When considering McKesson's P/E ratio of 16, it has the lowest P/E out of its cohort which also adds to this buying opportunity narrative (Figure 4). As compared to its direct competitors, AmerisourceBergen (TICKER: ABC) and Cardinal Health (TICKER: CAH) with P/E ratios of 49 and 19, respectively.
Figure 1 - Google Finance one-year performance of MCK spanning the 52-week range of $243-$148
Figure 2 - Fidelity earnings graphs showing the last three consecutive quarterly earnings beats
Figure 3 - Fidelity data showing analysts ratings and dividend payout ratio
Figure 4 - Google Finance P/E comparison across MCK's cohort
Growing healthcare and prescription drug forecasts as a catalyst for McKesson
According to the Centers for Medical and Medicaid Services, medical expenditures are projected to grow at an average rate of 5.8% per year through 2024. This translates into 1.1% faster than GDP throughout this time period. The healthcare expenditures as a percentage of GDP are expected to rise from 17.4% in 2013 to 19.6% by 2024. Healthcare spending is projected to have grown 5.5% in 2014, significantly outpacing economic growth. The greater spending on overall healthcare is mainly attributable to the Affordable Care Act (ACA) health insurance coverage and rapid growth in prescription drug spending. As a result of ACA, the domestically insured is projected to have increased from 86% in 2013 to 89% in 2014 as 8.4 million individuals are projected to have gained coverage. Post-2014, national health spending is projected to grow at a 5.3% clip in 2015 and peak at 6.3% in 2020.
Given these projections, this scenario bodes well for the overall healthcare sector as more individuals have access to health coverage and prescription drugs. Specifically regarding MCK and prescription drug expenditures, this area is projected to have grown 12.6 percent in 2014 to $305.1 billion. Driving this growth were new specialty drugs and increased prescription drug use among people who were newly insured. Prescription drug spending growth is projected to average 6.3% annual growth from 2015 through 2024. Taken together, as the biotechnology sector continues its innovation and continuous supply of medications to treat and cure many different diseases coupled with the growth in overall medical spending may present an investment opportunity for companies that provide prescription drugs and pharmacy benefits.
McKesson is driving growth via acquisitions and partnerships
MCK recently acquired the pharmaceutical distribution division of UDG Healthcare plc. This acquisition will add a leader in pharmaceutical distribution across the Republic of Ireland and Northern Ireland to McKesson's European business. This acquisition is in addition to the recent announcement that MCK also acquired 281 pharmacies operated by Sainsbury's in the UK. These two acquisitions, once fully integrated will boost both top and bottom line revenue while geographically expanding its footprint across Europe, specifically in Ireland and the UK. MCK also recently announced the signing of a five-year distribution agreement with Albertsons to include the sourcing and distribution of both branded and generic pharmaceuticals, commencing on April 1, 2016. Albertsons' network of nearly 1,700 pharmacies in their 2,200 stores across the country will be supplied by MCK. This distribution agreement between MCK and Albertsons will extend through April 2021. Collectively, MCK is growing its business organically and via strategic acquisitions and partnerships to drive shareholder value and growth for the long-term.
Growing revenues alongside dividends and share buybacks
On an annualized basis MCK has grown its revenues greater than 46% over a three year period from Q1 2013 through Q1 2015. During this 3-year time frame, MCK grew revenues from $122.196 billion in 2013 to $179.045 billion in 2015. From 2014 to 2015, revenue grew by a 30% clip while operating profit grew at a greater than 20% clip.
In addition to growing revenues and profits, MCK offers a backdrop of dividend payouts along with a share repurchase program. MCK has increased its quarterly dividend payout by nearly 360% over the past ten years from $0.06 to $0.28 per quarter. This translates into a 0.75% yield based on its current price.
MCK currently has a new share repurchase program that was approved and earmarked $2 billion to buy back and retire shares. This would allow the company to remove over 13 million shares from the open market or 5.5% of outstanding shares. This newly approved share repurchase program is very aggressive and a great way to return capital to shareholders while the price is suppressed. Taken together, capital is being deployed in a variety of ways via acquisitions, dividends and share repurchases to reward shareholders.
MCK is well positioned for future growth and success in the healthcare space. MCK has been highly acquisitive, growing dividends over time and buying back its shares to drive shareholder value. Its major acquisitions and partnerships via UDG Healthcare plc, Sainsbury's pharmacies and Albertsons position MCK to continue its strong performance and competitiveness in the marketplace. The company has utilized capital to acquire other assets to drive growth into the future. In addition to their acquisitive manner, MCK also offers the backdrop of dividends and an aggressive share repurchases to add value to shareholders. McKesson presents a compelling buying opportunity as the stock has fallen to a multi-year low. MCK appears to be undervalued based on its growth and future earnings as measured by its P/E and PEG ratios.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in MCK over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.