MCK is a boring stock.
Its not a get rich quick stock, but its definitely an investment you make when you want to be “the house”. MCK is in my real portfolio, and every quarter I check on my portfolio and reassess the companies I own to see if they still make sense to hold or replace. By only checking my stocks once every three months, I can remove the emotions that come with the extreme ups and downs of the market. MCK is up 60% since I purchased it a few quarters ago. For me, MCK is still a big buy, and today I’ll walk thru my thoughts on why MCK will be staying in my portfolio.
McKesson is all things medical, just check out their product list here. If you ever went to the hospital, a clinic, or a doctor’s office, chances are high you used a McKesson product. They do everything: from pharmacy dispensing error detection to lab supplies and equipment. If its medical, they want to be in it.
My first step in my process is to NOT look at its price. I instead look at their recent quarterly presentation. You can find McKesson’s presentations here. So, they made $60 Billion dollars last quarter in revenue. That’s good. Of that $60 Billion, they returned $1.1 Billion to shareholders ($1 Billion in share buy backs and the rest in dividends). These are the key good signs:
- Revenue is going up
- Earnings per share is going up
- Dividend/share is going up
- The company is so confident in their future they are taking cash and buying their own stock
Company buy-backs are controversial. Some think it helps to prop up the price of a stock. However, when you have a company this big, a buy-back typically represents the company believing their company is legitimately undervalued in the market and so they are taking advantage of this by buying undervalued stock. If a performance target for the leadership is to increase their company’s price per share, then share buy-backs are a red flag. In this case, I accept the leadership is possibly propping up their earnings per share (less shares mean you get more earnings per share), but the business looks healthy so I’m fine with this.
Now, I’m About to Get Preachy for a Moment
If you know me, you know I believe all investors should be activist investors (or at least vote in shareholder meetings for goodness sake!). There is a whole section in McKesson's investor presentation about Opioid legal fees and claims. These costs of about $109 Million are absolutely inconsequential to McKesson’s financial health. If you’re an investor in MCK (or maybe investing in the future), please complain to the McKesson board and leadership to give some more money for the Opioid crisis. Its pretty pathetic that McKesson’s core vision and priorities are:
- Focus on People and Culture
- Strengthen the Core (I hate this priority so much. What does this mean? Are you doing crunches?)
- Streamline the Business
- Invest in Oncology and Biopharma services (I objectively do like this one)
These priorities don’t include “Improve the health of people who use our products”.
But on that note, I’ll get off my soap box.
Why I’m Keeping MCK on Big Buy
The biggest reason is the revenue growth. Revenue continues to grow at a consistent rate and the company has no reason to believe this trend won’t continue into 2022. Cash is healthy (enough) and the companies profit margins are good at around 16%. The earnings per share have been shaky this year. But there was nothing I could find that indicated earnings would not go back to positive levels in 2022. The company predicts earnings per share will likely increase in 2022, while revenue will grow 4% to 7%.
Not everything is rosy with McKesson. I’m not a fan of their book value per share being negative. This is an oversimplification, but a negative book value per share means that they have more debt than cash and assets on the books. This is not a red flag, but if revenue trends down next year or debt trends up, I may consider closing this position. For the amount of debt they are comfortable holding, I expect revenues to increase as predicted in their report and profit margins to stay at the levels they are at now. At these prices we are buying growth potential and the leadership needs to deliver.
And please, if you do buy or own McKesson, tell them to put more effort into helping the opioid crisis for goodness sake.
I/we have a position in an asset mentioned