If you have ever looked at the large drug distributors as potential investments, McKesson (MCK), AmerisourceBergen (ABC) and Cardinal Health (CAH), you were probably struck by the fact that these companies have small single digit gross margins and net margins are even tinier, usually under 1%. What these companies lack in margins, they often make up in volume as they generate a lot of revenue from their numerous divisions. For example, McKesson’s revenue in fiscal 2022 was $264 billion and that translated into net income of $1.11 billion with a net margin of just 0.42%.
The low margins, volatility of their bottom line results and complicated business models with dozens of business divisions has kept me away from the drug distributors. However Berkshire Hathaway not only started a position in McKesson in Q1 2022 but increased their position by 9% last quarter according to a 13-F filing earlier this week. Another well known investor that got recently involved in drug distributors is Elliott Management, which has a large stake in Cardinal Health (CAH) and is agitating for change.