McKesson: Rare Opportunity

09/09/2015 7:00 am EST

Focus: STOCKS

Taesik Yoon

Editor, Forbes Investor and Forbes Special Situation Survey

The broad market sell-off can present a rare opportunity to scoop up high quality, high growth cash generators at levels that normally would not be possible, suggests Taesik Yoon, editor of Forbes Investor.

We think leading domestic drug and medical supplies distributor McKesson Corporation (MCK) presents just such an opportunity. 

Boosted by the steady rise in demand for pharmaceuticals and smart acquisitions, the company has enjoyed exceptionally stable earnings growth, which has averaged over 14% annually over the past decade. 

This helped its stock climb to its highest level ever in mid-May.  But unable to escape the recent market sell-off, shares have dropped 20% since then. 

Given the company’s strong start to its new fiscal year and what is likely to be a favorable demand environment for years to come, MCK was well deserving of its premium valuation in our view.  Thus, we don’t think its shares will stay on sale much longer.

The company is the largest distributor of ethical and proprietary drugs and equipment, and health and beauty care products in North America. 

Through its acquisition of leading European drug wholesaler/retailer Celesio in 2014, it also became the biggest distributor of pharmaceuticals in Europe.

Strong Q1 results are just the latest example of the robust, stable growth MCK has enjoyed over the past ten years. Indeed, since 2006, its earnings have increased every year at an average compounded annual rate of 14.4%. 

Given such solid, steady performance, it should be no surprise that MCK’s shares have traded at a premium to the overall market for much of the past several years. 

Since May, however, the stock has plummeted 20%. As a result, its shares now actually trade at discount to the S&P 500’s current forward multiple of just under 16.

This would make sense if MCK’s fundamental health or operating prospects had deteriorated materially over this period. 

But over the longer-term, demand for prescription drugs in the US should remain on the rise, aided by further increases in the number of Americans eligible for coverage and the aging of the population. 

We think this will help MCK maintain its current streak of strong annual earnings growth and return its stock to the premium valuation it continues to merit.

Subscribe to Forbes Investor here…

More from MoneyShow.com:

Bristol-Myers: Healthy Gains in Oncology

Healthy REIT: What's Up DOC?

Small-Caps in Health Facilities

Related Articles on STOCKS