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One of the stocks Mr. Katsenelson likes in this situation is McKesson Corp. (MCK). This is a giant company (it ranks fifth in the Fortune 500) but few people outside the healthcare industry are familiar with it.
The company provides a variety of services to the industry but one of the main ones is drug distribution. Along with two other companies (Cardinal Health and AmeriSource Bergen) it acts as the middleman between drug manufacturers and dispensers (pharmacies, hospitals, doctors, etc.). Those three firms operate as an oligarchy in their segment of the economy, similar to the big five banks in the Canadian financial sector.
McKesson claims to be the oldest and largest health care company in the U.S., serving more than 50% of hospitals, 20% of physicians, and 96% of the top 25 health plans. It says it delivers one-third of all medications used daily in North America.
As well, the company has a Technology Solutions division that that provides software, consulting, and other services to hospitals, doctor's offices, imaging centres, etc.
The company's financials are in excellent shape. For the third quarter of fiscal 2017 (to Dec. 31) the company reported revenue of $50.1 billion, up 5% from $47.9 billion a year ago. On the basis of U.S. generally accepted accounting principles (GAAP), third-quarter earnings per diluted share from continuing operations was $2.86, compared to $2.71 a year ago. Stripping out one-time items, adjusted earnings per share came in at $3.03. The company projects earnings of between $9.80 and $10.30 per share for the full fiscal year.
For the first nine months of the fiscal year, McKesson generated cash from operations of $3.3 billion, and ended the quarter with cash and cash equivalents of $2.4 billion. During that period, the company paid $4.2 billion for acquisitions, repurchased $2 billion of its common stock, repaid approximately $390 million in long-term debt, invested $369 million internally, and paid $192 million in dividends.
The balance sheet is very sound. The company is sitting on $2.4 billion in cash. Long-term debt is a little under $6 billion, down from $6.5 billion on March 31, 2016 (the end of the last fiscal year).
The share price hit a 52-week high of $199.93 last July but has been in decline since as uncertainty grew about government actions and how they might affect for healthcare companies. This has created a buying opportunity for long-term, patient investors.
The stock pays a small quarterly dividend of $0.28 per share ($1.12 per year) to yield 0.7% at the current price of $150.85.
I view this as an opportunity stock. The price has been driven down by political agitation but the company is financially strong, its business is secure, and the downside risk from here is minimal.
Action now: Buy.