MCKESSON CORP

MCKESSON CORP (MCK) — Investment Memo

🐂 The Bull Case (Warren's voice)

• Moat durability: The $359B purchasing scale is an unbreachable moat in pharmaceutical distribution — no competitor can match the logistics network that delivers drugs to hundreds of thousands of pharmacies within 24 hours. Switching costs are moderate but real: replicating inventory management, compliance systems, and manufacturer relationships would take years and billions.
• Exceptional economics: FCF consistently exceeds Net Income ($5.5B vs. $3.3B in 2025) — cash is real, not accounting fiction. Share count halved from 290M to 126M over a decade, driving EPS CAGR of 17% despite net income growing only 9.3%. That’s capital allocation with a vengeance.
• Attractive entry: At $387 per share (25% below intrinsic value), the business yields a 7% FCF yield with near-zero maintenance capex. If the market panics over Walgreens headlines and drops MCK to $350, you buy a tollbooth that generates $5.5B in free cash flow for $44B — a 12.5% owner’s yield. That’s the price where Buffett would start nibbling.

🐻 The Bear Case (Charlie inverts)

• Kill shot #1 – Walgreens collapse: Walgreens alone accounts for $46B+ in revenue (13% of total). If they declare bankruptcy, renegotiate pricing, or go direct with manufacturers, McKesson loses a fifth of its top line overnight. No moat survives losing your biggest customer when net margins are 0.9%.
• Kill shot #2 – PBM vertical integration: CVS (owns Aetna & Caremark), UnitedHealth (owns OptumRx), and Cigna (owns Express Scripts) are already cutting out distributors for their own mail-order pharmacies. If the trend accelerates, McKesson gets squeezed out of the most profitable channels. The tollbooth becomes a detour.
• Structural margin erosion: Net margin peaked at 2.6% (2017) and now sits at 0.9% (2025). Revenue grew 16% but net income only 10% — all growth is drug price inflation, not pricing power. This is a commodity business that pays for scale with fragility. Over a 5–10 year horizon, margin compression is the most likely permanent impairment — not a recession, but a slow bleed to 0.5%.

💰 Valuation & Margin of Safety

• Intrinsic value estimate: $516 per share (DCF: 7.2% FCF growth, 10% discount rate, 3% terminal growth).
• 25% margin of safety entry: $387 per share (conservative — assumes Walgreens risk is real but contained).
• 50% margin of safety entry: $258 per share (Buffett’s ideal — prices in a structural margin collapse to 0.5%).
• At a current market price of ~$600, MCK trades at a 16% premium to intrinsic value. It is expensive for a 1% margin business with a narrowing moat and a ticking time bomb in its largest customer.

Verdict: WATCH

At $600, the price exceeds intrinsic value and the moat is narrowing; we pass on buying today. If the stock falls to $387 or below, the tollbooth economics become compelling enough to offset the customer concentration risk — but only then. Until that price appears, we watch and wait for a better entry or a clearer signal that Walgreens is not a corpse walking.