McKesson: Shifts in Medical Care

06/24/2016 7:00 am EST


Joe Duarte

Editor, Joe Duarte In the Money Options

Our latest recommendation is the largest global provider of medical products and services; I use its products in my medical practice every day, notes Dr. Joe Duarte, biotech and healthcare expert and editor of Breakthrough Tech Profits.

McKesson (MCK) distributes products such as Band-Aids, medications, needles and syringes, along with other disposables.

McKesson is central to the global healthcare system because its medical supplies, medical practice management and wholesale drug distribution businesses are used in and out of hospitals. 

Beyond hospitals, McKesson supplies surgery centers, doctor’s offices and individuals.

Increasingly, the company will profit as treatment moves outside hospitals, taking advantage of new Affordable Care Act and Medicare rules.

McKesson is adept at using new technologies to expand sales and cut costs. It is a prototypical Applied Technology Investment System (ATIS) stock, because of its focus on technology, automation, and supply chain management tools.

ATIS is a model I developed to identify companies benefiting the most from new technologies.

For example, McKesson was ahead of its time with its first-in-the-sector partnership with IBM (IBM), a move that paid off in spades. In 2014 alone, McKesson cut $1 billion in costs by using IBM’s supply chain software.

McKesson also has a steady ground game, expanding its Health Mart franchise, which supplies private, locally owned pharmacies. 

It has further expanded via large grocery-store-based pharmacies including Safeway-Albertsons (SWY) and, as of mid-May via a major distribution deal with Walmart (WMT).

In April McKesson bought Biologics and Vantage Oncology. Biologics is the largest independent oncology-focused specialty pharmacy in the US.

Vantage is a leading national provider of radiation oncology and integrated cancer centers, adding to McKesson’s already existing network of 120 integrated cancer centers across 29 states.

The hidden gem in McKesson’s business plan may be the self–administered healthcare segment — in other words, patients taking care of themselves. 

As more patients are discharged from hospitals early to recover at home, they have to buy supplies such as bandages and other items needed for post-operative care. McKesson’s self-administered healthcare segments takes advantage of this shift.

Given the company has a strong balance sheet ($3 billion in cash), strong cash flow ($3 billion last quarter), and strong rising earnings and the ATIS edge, it’s a good buy at around $184 a share.

Buy McKesson up to $194 and expect to hold the stock for at least one to two years. Given the stock’s price currently, a 20% return in the next year is a conservative gain.

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