'Exciting idea': Fund manager loves this pharma stock — and analysts see more upside ahead

Published Wed, Feb 28 20246:22 PM EST

Amala Balakrishner @in/amala-balakrishner @_amalabk

Health care companies have gained traction in the past year, with investors piling into the likes of weight-loss drug manufacturers Eli Lilly and Novo Nordisk . But one firm in the wider ecosystem that's perhaps lesser known stands out to fund manager Freddie Lait, which is McKesson Corp — the U.S. pharmaceuticals distribution company. "[It's a] great example of the sort of things we're looking for — if I'm honest, it's a business I've been watching for about 10 years," Lait, chief investment officer at Latitude Investment Management, told CNBC Pro Talks on Feb. 21. McKesson — which distributes drugs to hospitals and pharmacies from manufacturers — has been "integrating a little bit of technology and value-added services to the end of distribution chain," giving the company a return on capital of around 15% -20%, he said. Calling the company an "exciting idea," Lait noted that the 100-year-old business is "very defensive and very diversified." "We bought it a year ago at I think on 11, or 12 times earnings. That's probably going to grow 15 to 20% a year for the next five years … It's now up to 16–17 times," he said. This ratio is an important metric used by traders to gauge the value of a stock. He added that McKesson is among the top three drug distributors in the U.S. The other two companies dominating the market are Cardinal Health and Cencora . Lait manages over $750 million collectively between two funds — the Latitude Horizon Fund and the Latitude Global Fund . McKesson is among the top 10 equity holdings in the Latitude Horizon Fund. Shares of McKesson have been heading up over the last few days, after it recorded an 18% rise in third-quarter sales to $73.02 billion, surpassing LSEG consensus estimates. Over the last 12 months, shares of the drug distribution company are up around 45%. MCK YTD mountain Year-to-date shares in McKesson Corp Lait's confidence in McKesson is reiterated by analysts at JPMorgan, who see its latest earnings as "positive" given that "the company increased several segment profit expectations for FY24 and provided initial FY25 commentary that appears in line with to slightly better than preliminary expectations." "On the Rite Aid bankruptcy, management continues to reserve against receivables; however, there is no expectation for an impact to FY24," they added, referring to a dispute McKesson had with the drugstore chain. Elsewhere, analysts at U.S. investment firm Leerink Partners are optimistic on the prospects of McKesson and is initiating its coverage on the the stock with an outperform rating and target price of $600 — giving it around 15.4% potential upside. "We think MCK has successfully transformed itself from a pharma distributor with ancillary businesses to an enterprise healthcare services entity, grounded in the pharma and non-acute care medical supply chain," the firm's analysts wrote in its initiation report dated Feb. 26. "The totality of the growth, combined with positive end market exposure across its major segments, should sustain the company at/above its long-term targets. Because of this dynamic, we see MCK as warranting a premium multiple more akin to other market-leading healthcare businesses to capture the magnitude and predictability of growth," they added. Of the 19 analysts covering the stock, 14 give it a buy or overweight rating, while three have hold ratings and one has a sell rating. The average price target on the stock is $550.25, according to FactSet data, giving it potential upside of 6%. — CNBC's Michael Bloom contributed to this report.