An aging U.S. population is increasing the demand for medication, and this company delivers. By Teresa Rivas and Al Root

   -- McKesson has consistently grown ahead of the broader market in recent 
      years. 
 
   -- The stock's steady earnings should attract safety-minded investors in the 
      current climate. 
 
   -- Margins could edge higher as the company transports more specialty drugs. 

From broken wine glasses to vertical pizza, everyone has a delivery horror story. When it comes to more-crucial items, there's less margin for error. McKesson transports vital medications safely and quickly -- and delivers healthy returns for investors, too.

The Irving, Texas--based company is the largest drug distributor in the nation, generating hundreds of billions in annual sales from dozens of distribution centers. With an aging population, and more Americans taking GLP-1 weight-loss drugs, increasing demand for medication has led to increasing profits. Shares have jumped 45% since Barron's recommended them in October 2023.

It's time to revisit the stock. McKesson has jumped 21.7% in 2025 as tariff-shocked investors flee to havens amid the recent stock selloff. At 19 times forward earnings McKesson still trades at a discount to the S&P 500 index -- even as earnings per share are expected to climb by double digits this year and next, ahead of the broader market. Ongoing economic uncertainty should keep investors interested in defensive names, as drugs are one of the last things that consumers cut back on, even in a downturn.

"You're paying a below-market multiple for a lot more certainty and better growth," says Brian Krawez, president and portfolio manager at Scharf Investments, who notes that McKesson's roughly 11% growth rate over the past decade is better than the S&P 500's. His fund owns the shares.

"When you put it all together, it's a company with really high market share, a really high-cost advantage, one that's focused on the U.S. and a part of the economy that is less volatile," he says. "It should be far more insulated" than many other companies, no matter what happens with trade and other domestic policy changes in Washington, D.C.

That's more valuable than ever, given how the stock market reacted to tariffs in the first quarter. Even if the U.S. enters a recession, drug demand remains fairly steady. Investors have been willing to pay up for McKesson's predictability in both good times and bad. The shares have outperformed the index and the Health Care Select Sector SPDR exchange-traded fund over the past one-, five-, 10-, and 20-year periods.

Profit margins are razor thin, at about 1%. (The average for nonfinancial companies in the S&P 500 is closer to 13%.) But that means McKesson is rarely in the firing line when it comes to political promises to lower drug prices. It's also expanding into oncology and specialty drugs that require special handling -- and with those higher costs typically come higher margins.

Morgan Stanley's Erin Wright boosted her price target on McKesson to $745 this week, up 7.4% from Wednesday's close of $693.53. She writes that we are in a "golden age" for drug distributors, and that she sees the stock as a "safe haven in the current backdrop, given visibility on growth and durable margins while evading some policy scrutiny."

Total U.S. drug spending has grown about 5% a year on average for the past few years, with specialty-drug share increasing as a percentage of the overall total. Although there have been rumblings about changes on Medicaid, it doesn't keep Scharf's Krawez up at night: "Politically, it's very challenging to take away people's healthcare." Krawez notes that McKesson was the first stock he ever bought when he was just a child teaching himself about the stock market, and decades later he still finds himself a shareholder.

Even eye-watering settlements aren't much of a setback. In 2022, drug distributors agreed to pay almost $20 billion over 18 years to settle litigation related to opioid abuse, even as they dispute their role in the crisis. McKesson's share was $7.4 billion.

That has done little to break McKesson's stride. "We bought it when it was dirt cheap due to the litigation around opioids," says Muhlenkamp Fund portfolio manager Jeff Muhlenkamp. "We thought the headwinds caused by the litigation would be survivable....We still like the company; we think it's well run, and they're doing smart things with their capital."

McKesson recently acquired an 80% controlling interest in Prism Vision for $850 million. Prism is a provider of general ophthalmology and retina management services. "This marks an important step as we continue to enhance our specialty services platform and capabilities," said CEO Brian Tyler on his company's earnings conference call in February.

Muhlenkamp's decision turned out to be a good call, as the settlement removed a lot of uncertainty, which helped the stocks of all distributors. Likewise, it helps the company's environmental, social, and governance profile. While ESG investing might not be in vogue now, Hennessy Stance ESG ETF portfolio manager Bill Davis says that McKesson scores well from an ESG standpoint, with plenty of momentum from institutional investors.

Besides McKesson, the other major drug distributors include Cencora and Cardinal Health. The virtual triopoly of the industry helps all players, but McKesson's scale means that it has the best gross margins in a slim-margin business, and often makes it the partner of choice with big pharmacy retail players.

After all, when it comes to medications, no one wants surprises. For investors tired of recent market shocks, McKesson can offer similar peace of mind.

Write to Teresa Rivas at teresa.rivas@barrons.com and Al Root at allen.root@dowjones.com

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April 04, 2025 21:30 ET (01:30 GMT)

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