10-Minute Investment Autopsy No. 15: McKesson
When a simple thesis on a few key levers is enough.
If you haven’t read the guide to the 10-Minute Investment Autopsy series, you can find it here.
The Original Thesis
Who: Larry Robbins
When: October 2005
What: McKesson (ticker: MCK)
The Thesis:
Drug distributors are the choke point in the value chain, with the top 3 controlling 90% market share
Business model has changed from speculating on inventory to fee for service, resulting in much lower capital intensity and a higher conversion from Net Income to FCF
McKesson is a share taker in the industry
Company will benefit from higher drug utilization and higher generic penetration
Thinks the company will earn $3 in EPS in Fiscal 2007, 10% above Wall Street estimates
Believes McKesson will grow 20%-25% through 2008 and then 12%-15% from there
At 15x EPS, the stock is trading at a discount to the market which is too cheap for a business that is hitting on all cylinders for the next few years
These are the highlights of McKesson’s then-recent financials up to the point when Larry was presenting his thesis:
This is the stock chart up to the time when Larry presented his thesis:
Pause here. Think through the thesis and the facts and decide what you agree with, what you disagree with and whether you would invest based on the information available.
What Happened (Just the Facts)
McKesson stock meaningfully beat the market, with the stock increasing at ~9%+ per year over the 5-year period, compared to the market at 2%
Compared to the other two drug distributors, Cardinal Health and AmerisourceBergen, it did much better than the former but not as well as the latter
There is a lot more to the case:
The Autopsy - the reasons for what happened
The Lessons that you can apply to your own investing
Discussion Questions for you to think about and discuss with other thoughtful investors in the weekly case thread