McKesson Benefits as the Population gets Older

Nihar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It may be unfortunate, but an aging population means a sicker one. No matter how far the boundaries of human life expectancy are pushed, the final years of life tend to be ones of more disease. Also, it seems to be easier to keep people alive longer, but not healthier. So increasing life expectancies mean that people stay sicker longer. It seems really depressing, but it is not that bad. Very often, simple treatments fight off the most common ailments. Other chronic diseases can be easily managed, and only a few lead to drastic declines in the quality of life, such as aggressive cancers. On the whole, living longer has been good for most people, and it has been good for McKesson (NYSE: MCK). As the overall population shifts to an older demographic, McKesson should do even better.

McKesson has an exceptionally low margin business, with profit margins at 1.34% for the quarter ending Sept. 2012. Revenue for the trailing twelve months is at $123 billion, and net income for the trailing twelve months is at around $1.6 billion. That gives a nice picture of just how much profit McKesson makes off the enormous amount of sales. This is chronic, and looking at 10 years of profit margins it has always been in the low 1% range, and more commonly slightly below 1%. McKesson just agreed to buy one of the competitors that has a 2% margin.  I am talking about PSS World Medical (NASDAQ: PSSI), which McKesson agreed to acquire at $29 a share.

The earnings call mentioned that McKesson expects $100 million in synergies after 4 years. Obviously, that focuses on one narrow aspect of the acquisition, but it is a start. With the purchase comes increased business and reach. McKesson is pretty aggressive about acquisitions so you should see more of that in the future. Acquisitions are always a good time for investor entry, unless of course the acquisition is poorly thought out. McKesson is not overreaching with this buy; it has the framework in place to absorb the new organization.

Focusing more on the long term future, I know certain individuals with chronic issues that are customers of McKesson Home Care. This service basically amounts to periodic deliveries of items the sick person needs. Most people are familiar with the drop shipment of diabetic supplies, but this is for conditions resulting from other illnesses, like cancer. All the special needs of the patients are delivered to the house, such as specialty food and dental care supplies. In some situations a standard toothbrush is out of the question, and they make something for that.

Cardinal Health (NYSE: CAH) is the slightly smaller competitor to McKesson. If you are looking for long-lived safety McKesson would be the standard choice, but Cardinal is better if dividends are sought, considering the timescale of a demographic change. This might just stem from the company being less well-known, or from some other factor not readily noticeably in the fundamental metrics.

Cardinal has similar financial metrics to McKesson, but because Cardinal is smaller the numbers are lower. The profit margin is right around 1%, and net income trailing twelve months is $1.10 billion off revenue of $106.65 billion. Overall the company looks similar to McKesson. Cardinal commands a lower P/E at around 12 ,versus McKesson's 14, but I would not look to this to provide value.

Cardinal's one positive that puts it over McKesson is the dividend yield. Cardinal has a 2.7% yield, while McKesson has a 0.9%. It really comes down to the position the investment would play in a portfolio. Obviously the yield is not that great for a portfolio that is dividend focused. The yield gets a bit more weight because waiting for an aging population to get sicker and need the medical supplies these companies provide might take some time. These are not drug companies, so if a pill solves the issue, these companies will not benefit directly. There are tons of pharmaceutical companies, but a national company that sends syringes, bandages, tubing, etc. straight to the house is rarer.

That means the time period for these two companies to start seeing sales increase is pretty long. If accelerated growth is down the line, getting a dividend in that time sweetens the deal with Cardinal. However, with McKesson's sometimes aggressive acquisitions it might be in a better position to grab more of that growth. Usually more demand is great for every company in that industry, but if you have to pick between two companies in the same industry the choice gets a bit more complex.

Cardinal might be a bit smaller, but overall both companies are similar. If demand accelerates it'll come with little warning, despite people in general expected to be older. It also takes a long time to build production capacity, especially in the medical field with its rigorous regulations and standards.

Each of these companies has other businesses, but I wanted to focus on the expected demographic shift that is coming. There is no doubt that people will get older and the average age will increase. McKesson operates in many countries with the demographics shifting. There is also McKesson's billing and financial services unit, which seems interesting. Outsourcing billing is already very common and there are companies that could step into that easy even if they are not currently in the health care field. That is why I wanted to start with the demographic shift.

There are very few guarantees, but the population will get older. It is my opinion that as the population ages McKesson and Cardinal will see more sales. McKesson is my favorite though, because I like the strategy of consistent acquisitions. I think McKesson will be better suited to the future. I might touch on the companies again and look at ventures more removed from demographics.


TheArchivist has no positions in the stocks mentioned above. The Motley Fool owns shares of McKesson. Motley Fool newsletter services recommend McKesson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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