 Good day, fellow investors! It's the end of the month and it's customs for a YouTube channel, investing channel, to make the free stocks to buy in the next month. Last month I made three contrarian plays with a gold miner, copper miner. This month I want to focus on great businesses. I'll separate this series in three parts so that we can really dedicate more time to analyzing each company. I'll start today with McKee-sen, then I'm still working on a growth business, internet of things stock that I plan to prepare in the coming days and then I'm going to finish with a European stock, a great European business that will come from my mentor, so even a stock for Europeans. Let's start with McKee-sen. McKee-sen is a very interesting stock, a distributor of pharmaceuticals in the United States, a little bit in Europe, of course, and in Canada. The stock has been bought by Seth Klarman recently, he has opened the position this quarter and some other value investors have bought McKee-sen. I will analyze McKee-sen from a value investing perspective, analyze the risk reward, see what we can expect as investors, what kind of return from the business and then you will see whether that fits your portfolio or not and in this period of time. It looks like McKee-sen is a great business, has a good return on capital, it is recession proof so it is a defensive sector, it offers value, it produces cash. There are some concerns that we will also touch but from a general perspective it is a value play in this environment and Seth Klarman and other long-term value investors have been accumulating which makes it very very interesting. Let's start with the overview of the stock, then dig into the risk and rewards, calculate what will be our returns and then conclude. So at a glance the company distributes pharmaceuticals so no matter what happens in the economy people will need their pharmaceuticals and it had 208 billion in revenues in 2018, it operates on thin margins as it is a distributor but still the cash flows are 3.8 billion it delivers one third, one third of all prescription medicine in North America. That's a business with a moat. We all know the population is aging and there is nothing that can be done in relation to that, perhaps an interesting trend to invest in and McKee-sen certainly gives us exposure to that. We have to see how big of a moat their business has and whether and how much will it be affected by the various Amazons entering the field. It is important that they can invest in growth but also reward shareholders, we'll see later about the return on capital, however we see here that shareholders returns are strong and they are also investing in growth. So let's discuss the bull thesis and the bear thesis and then see whether it is only sentiment or there are some real business concerns that will lead the business down the drain as it is currently priced. So the main investing thesis is that McKee-sen stock has declined from a high of 240 to the current lows of 120 while the business fundamentals haven't really changed much. On the fundamental side if you look at line 1 revenues have been growing steadily and doubled over the past 10 years. Gross margins and operating income have been relatively stable while the dividend payout has tripled. So the dividend has tripled line 2. Line 3 something very important they have been doing a lot of buybacks especially when the stock is low and they still have I think 3 billion, 4.2 billion in buyback authorization which is a lot compared to the current market capitalization. So the number of stocks outstanding went down from 270 million 10 years ago to the current 204 million. You can see that online free. Despite the buybacks book value has increased from $22 to $47 per share operating cash flows have steadily increased line 5. Capital spending is very little in comparison to the cash flow so it is the business doesn't need a lot of capital which is extremely important and then it because it leads to number seven a lot of free cash flow that can be distributed to investors. If we look at the free cash flow it has grown 48% over the past what is this eight years so the company is doing a good business is rewarding shareholders and creating value for shareholders. The price to cash flow ratio is now at nine which is ridiculous for a company in a growth sector as we said people are aging. So the current market cap of McKesson is 24.5 billion the free cash flows will probably be around 2.5 3 billion this year and also next year. So if nothing changes is if we assume no growth no growth at all for the company over the next 10 years the company will make the current market capitalization they will make it in free cash flow over the next nine years even less eight years so if you if McKesson is worth zero at after eight years then the current price you pay is equal to the free cash flows you will suppose you are supposed to get in some form over the next eight years and this is where why value investors are getting in they see okay my margin of safety are the cash flows that the company is producing now that the company will probably produce over the next eight years if the business doesn't go bankrupt in the next eight years which is highly unlikely then whatever I get after year eight is value for free and that is why you see said Clarman investing in this company there is a lot of uncertainties where will the pharmaceutical distribution business be in eight years will Amazon take over but it won't probably happen over eight years so everything that you get from McKesson after year eight is free just an example of how important cash flow is look at Netflix their free cash flow is extremely negative so this is a different kind of business and of course it's a growth business it's a very exciting business but it's not a value investing business as we said in yesterday's video value investing is about good boring businesses with a mode that produce cash so a mode for McKesson is that it owns one third of the prescription business in the United States which gives it power of scale efficiency distribution network everything costs less and now as there are other two other players Amerisource Bergen and Cardinal Health so those three players divide 90% of the market so it will be extremely costly for for new entrants to come in the market and compete with them so there might be a new entrant coming in but it's highly unlikely that they will reach their margins or if they come in they will have to lower the margins for anybody everybody and then there is no profitability in the sector so this is a very very strong mode that McKessons and the other two players have so we can say that for now it has a mode even if later we'll discuss the concerns surrounding that mode now something very important with a great business is return on invested capital McKesson has a return on invested capital of around 12 percent over the past 10 years so that is the return you might expect over the long term because in the long term investment returns are close to the return on investment capital if you can buy it at a very low valuation even better here is the fiscal 2018 free cash flow 3.8 billion on a market cap of 24.5 billion and they have shareholder returns of 1.9 billion through share buybacks and dividends which leads to a yield of 7.7 percent on top of the return on capital on top of the investments in growth of 3.5 billion so a very very interesting situation here that should reward shareholders in the long term just to look at the fundamentals McKessons long term debt is just 8 billion on 3 billion of cash flows per year is not that bad so let's say the debt is not that high you will see on the balance sheet there is a lot more debt but that is payables which leads to inventory compared to inventory and receivables is not high at all so when you compare the book value of 47 dollars with 14 dollars of free cash flow per share the return on the book value is a staggering 27 percent if that continues to compound even at 12 percent from the return on invested capital and it is recession proof because the spending will go on no matter what happens in the economy health carries key then the long term in the long term McKesson will continue to compound as it did in the past 10 years increase the dividend increase the buybacks depending on how it's better to reward shareholders and grow as it is an asset-like business however let's go to the bearish thesis without a bearish thesis we wouldn't have such a low stock price and it wouldn't be an opportunity so it's very important to focus on the risks then compare the risks to the reward and then see compare McKesson to many other stocks many other great businesses that are out there and then see whether it fits your investment portfolio or not let's discuss the amazon threat and the opioids epidemic issue especially in the united states so amazon shakes up drugstore business we deal to buy online pharmacy pill pack we know that amazon has shown its intention to enter the drug business pharmacy business distribution business and everybody is extremely afraid because of that so there is further pricing pressure in the industry political sentiment so a lot of negatives surrounding the environment but mckesson keeps printing cash which is very interesting however the market significantly reacted to amazon's acquisition acquisition but we have to keep in mind that pill pack had revenues of 100 million in 2017 which is not much compared to the 208 billion for mckesson now let's assume the worst case scenario amazon becomes a big player in the industry let's say that amazon gets 3 percent of the market per year and after 10 years it gets 30 percent of the market that would be very detrimental for other companies right well depends how you look at it the market the pharmaceutical markets remember people are aging i am now already 10 minutes older than when i started this video and the market is actually growing at five percent so even if amazon takes three percent of that then there is still two percent left for the others and remember value investors focus on the cash flows that will be there no matter what amazon does in the next five ten years because it's not so easy and it doesn't go that fast perhaps even amazon buys out mckesson like it did with whole foods so that's another interesting position risk reward as i said the industry landscape five percent total market sales growth up to 2022 there is still europe etc etc now another issue is the opioid epidemic and this is something that concerns me extremely much because this is really crazy the daily doses of opioids in the 20 most populous countries shows a staggering statistics if the us or germany would fail to the japanese average revenues for mckesson would decline significantly so opium pain relief in different countries us gets 30 times more opioid pain relief medication that it needs so this is of course a risk for the company i'm personally very fortunate that since i met my wife and she has taken care of my nutrition for the past seven years i haven't taken a pill over seven years so if my wife gets famous that's another big risk for mckesson i hope she gets and i actually hope for the benefit of humanity that mckesson doesn't do that good even if i might perhaps even invest in it i still have to think those things sort those things out because on one hand i think drugs and pharma is not doing such a good thing when you see these extremely extreme statistics there is a lot of marketing there is a lot of profit chasing and probably mckesson will get its share of fines so that's something very interesting that might even put more pressure on the stock if we have a sequence of negative news fines controls etc etc which might happen and might be a negative for the company so that is something to keep in mind and always always compare many stocks and then opportunistically invest in those that are real bargains so to conclude what to expect for mckesson we have a 7.7 percent buyback and dividend yield we have a return on invested capital of 12 percent we have 5 percent market growth we have amazon concerns that won't happen that fast because we see i'm not sure that you are buying groceries online from Whole Foods yet perhaps some of you but it's not that fast it's business business takes a long time to develop and to really displace or disrupt something so the most likely outcome is that mckesson will continue to print cash over the next five ten years which will which gives a margin of safety so we have had a 7.7 return on investment a 12 percent return on investment capital growth when i add the 7.7 shareholder return we get now to the 12 percent return on the book value that they have i get to a return from mckesson of about 15 percent over the long term a business return for investors if mckesson gets a normal valuation not a nine price to cash flow ratio but a 20 price to cash flow ratio then you can expect an 80 percent increase in the stock price and the stock price you can expect to see it above 200 but there is a lot that has to change in the current negative environment in the industry however until that changes you might as well enjoy the shareholder returns am i going to invest in it i'm going to look a little bit deeper read the annual report listen to the conference calls i put it this on my watch list on my stock market research platform so i'm going to follow it and then see how it fits and whether it goes even lower or if it jumps up it jumps up i simply always compare this with many other businesses and then find the best investment i also have to sort out whether i want to be invested in such a pharmaceutical company that is i think chasing profits more than chasing people health and improvement which is something that i have to simply figure out i haven't ever thought about this i hope you enjoyed this video about mckesson it's a very interesting cop stock it has become a value investment so please subscribe tune in for my next videos about what to buy what to look for your portfolio and perhaps you'll find some interesting investment ideas thank you don't forget to comment and i'll see you in the next video