New Healthcare Opportunity Emerges as ‘Blue Wave’ Sweeps Washington
Investors should get ready for a change in narrative. This week, when President Joe Biden took the oath of office, healthcare once again took center stage.
And it’s a big, new opportunity.
Almost 400,000 Americans have died from COVID-19 since last February. The logistics of rolling out vaccines, some of which require special handling, will be daunting.
Enter McKesson Corp. (NYSE: MCK). The company has experience in this realm and is set to capitalize on this opportunity.
McKesson is the kind of business that normally flies beneath the radar. The Irving, Tex.-based company is sort of an operating system for healthcare. It builds software and systems to route critical supplies between manufacturers and distribution centers like pharmacies, oncology clinics, hospitals and doctor’s offices.
This middleman business is surprisingly large. McKesson logged $231 billion in sales during 2020, up 7.8% from a year ago. Keep in mind, this growth came despite a pandemic that caused the cancellation of many elective procedures and doctor office visits.
Now, McKesson managers are being asked to help clean up the pandemic.
CEO Brian Tyler told analysts in November that McKesson had been selected by the Center for Disease Control as the centralized distributor for refrigerated and frozen vaccines.
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The company is also working with the Department of Health and Human Services to make sure healthcare providers have the syringes, alcohol, prep pads, face shields and other supplies they’ll need to vaccinate as many as hundreds of millions of Americans across all 50 states.
And McKesson has the experience to do it. In 2009, a similar strategy was put into motion to tackle the swine flu epidemic. In short order, managers coordinated shipments from five vaccine makers to distribution points across the country. Three years prior, they helped coordinate the response to the H1N1 outbreak.
So far, federal agencies have committed $746 million to McKesson for COVID-19 response packages. That compensation is likely to grow … but that alone is not why investors should buy the stock.
McKesson shares rallied from $142 to $184 on the release of the second-quarter financial results in November. Citing the COVID-19 contracts, Tyler raised the outlook for fiscal 2021 earnings per share to approximately $16.25 from $15.10.
While optimism about the new government contracts is warranted, the real upside for McKesson shares is the economy returning to normalcy. Its core supply chain management business is stronger when hospitals, clinics and local doctors are seeing everyday patients under normal circumstances.
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Shares trade at 10.4 times forward earnings and 0.13 times sales. These metrics are on the extreme low end of historic multiples.
Based on a positive change in narrative for healthcare businesses and sales growth, McKesson shares could easily trade to $245 during the next 12 months, a 32% gain from the yesterday’s close of $182.79.
Savvy investors should buy shares into weakness.
Jon D. Markman