Google is a tech highflyer. McKesson is no Google. Its profit margins are literally around 1%. But its stock has grown 4x in 5 years, way outpacing Google and Amazon. In this analysis, we try to make sense of that. McKesson’s stock has grown 284% since 2020, mainly because of:
- a 97% increase in its trailing adjusted P/E ratio from 11x in 2020 to 22x now;
- a 49% growth in revenues, increasing from $231 billion to $345 billion during the same period; and
- a 28% reduction in total shares to 130 million; partly offset by
- a 6% decline in net income margin from 1.2% to 1.1% over this period
In contrast, Google stock has increased by 92%, fueled by a 174% rise in earnings from $2.93 per share in 2020 to $8.04 per share in 2024, although this growth was somewhat mitigated by a 30% decrease in its trailing P/E ratio from 30x to 21x during the same period.
We will examine these factors in detail. While MCK stock has outpaced GOOG, if you are seeking an upside with a steadier experience than individual stocks, consider the High-Quality portfolio, which has surpassed the S&P and achieved returns exceeding 91% since its inception.
McKesson’s Earnings Transformation: Key Drivers of Strategic Growth and Operational Efficiency
McKesson’s earnings have doubled, fueled by significant increases in both sales and operating income. Its revenue grew by nearly 50%, from $231 billion in 2020 to $345 billion today, owing to various strategic factors.
One major factor was McKesson’s pivotal role in COVID-19 response efforts, acting as the U.S. government’s centralized distributor for vaccines, tests, and medical supplies, which significantly boosted revenue during the pandemic. Furthermore, McKesson has deliberately broadened its pharmaceutical distribution business while leveraging the rising demand for specialty pharmaceuticals, especially in oncology and other complex therapeutic areas that usually yield higher margins. Recently, the growth in its pharmaceuticals distribution segment has been driven by higher prescription volumes, particularly for specialty products, national retail accounts, and GLP-1 medications.
The company has also bolstered its market position with strategic acquisitions, such as Rx Savings Solutions, OncoHealth, and a controlling stake in Florida Cancer Specialists & Research Institutes, which have enhanced its offerings in oncology and biopharma services. Moreover, McKesson’s medical-surgical distribution segment has seen strong growth, fueled by persistent demand for medical supplies that emerged during the pandemic and has persisted since.
In addition to the increase in sales, McKesson’s net income grew by 40% from $2.7 billion in 2020 to $3.8 billion currently. However, its net margin contracted by a modest 10 bps to 1.1% over the same period. As McKesson mainly functions as an intermediary between manufacturers and healthcare providers, its business typically operates on thin margins and high volume.
Another factor contributing to earnings growth is the significant 28% reduction in total shares outstanding, as the company repurchased shares worth $13 billion over the past five years.
McKesson’s Valuation Surge and Market Resilience
Since 2020, McKesson’s trailing price-to-earnings ratio has doubled from 11x to 22x, due to several important factors. Investors have reacted favorably to its strategic pivot towards higher-margin sectors, notably specialty pharmaceuticals, oncology services, and technology solutions—a shift that indicates more sustainable profits beyond traditional distribution. This strategic transformation, along with strong revenue and earnings growth, justifies the substantial increase in its valuation multiple.
The company’s outstanding performance is not limited to its valuation. In 2022, while Google fell by over 30%, McKesson recorded gains of more than 50%. This extraordinary performance is driven by its role as a vital component of healthcare infrastructure, making it attractive to investors looking for defensive investments in times of economic uncertainty. Moreover, McKesson’s steady cash generation offers crucial stability during volatile market conditions.
Investors especially acknowledged McKesson’s critical role during the pandemic, emphasizing its significance to public health systems and contributing to its stock price rise in 2022. This resilience has been repeatedly evident during recent economic downturns. MCK stock’s peak-to-trough decline of only 11.0% in 2022 far outperformed the S&P 500’s 25.4% drop. Similarly, during the 2020 market turbulence, McKesson’s stock decreased by 32.3% from its highs, slightly better than the S&P 500’s 33.9% decline, further demonstrating its relative stability in stressful market conditions.
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