DCC shares (LON: DCC) have been doing what many shares on the London Stock Exchange have been failing to do, namely accrue value. DCC, which some would call an industrial holding company, has continued to see significant buying activity despite being a FTSE 100 component.
On 16 March Jefferies International reaffirmed its buy rating for DCC, although cut its price target from 8230 t0 6230. The shares have climbed from 3878 at the start of last week, closing on Friday at 4705. But what is all the fuss about?
DCC shares: balance healthcare versus energy distribution
DCC is one of those stocks that does not get much publicity: it joined the FTSE 100 in 2015 and it sits on a portfolio of different business divisions. What may have been causing some investors to sell DCC shares in recent weeks has been its exposure to liquefied gas petroleum marketing in Europe, and its transport fuels marketing and retail activities. With oil at around the $30 mark, investors will have been worrying about its profitability in these areas.
But look further and you will also note it is a supply chain partner for global technology brands and, most importantly, owns a healthcare business.
DCC Healthcare seems to be the division within this conglomerate that investors are most interested, and which is supporting DCC shares while much of the rest of the FTSE 100 has been selling off last week. Within its healthcare activities, DCC Vital is involved in the distribution of medical and pharmaceutical products to the likes of general practitioners and chemists. It distributes both its own brands and third party products and is ranked as the top distributor to the UK GP sector. This includes both medical devices and pharmaceutical products.
In its results for the six months ended 30 September 2019 DCC proclaimed group operating profit up 14.5% to GBP 162 million. It increased its dividend by 10% to 49.5 pence per share. It radically cut its net debt against 2018, down from GBP 830 million to GBP 245.3 million. Even when you factor in lease creditors, it was still on course to reduce debt further.
In DCC Healthcare specifically, revenues were up. DCC had exited from a generic pharmaceutical business to focus more heavily on medical devices and UK primary care. It also picked up Ion Laboratories in Florida, which has helped to strengthen its position in the US market.
Keep an eye on the energy market risks
Investors in DCC stock need to balance their enthusiasm for its healthcare component versus its exposure to the energy market, especially petroleum products. The low oil price coupled with the likely recession the world is sailing into will impact other areas of its business and you will not be investing exclusively in its healthcare division. This may temper the firm’s attractiveness over the medium term.
That said, it is hard to argue with current enthusiasm for this stock, which is holding up as a solid defensive play in the current market. DCC shares were up 35% from Tuesday to Friday last week. We would agree with Jefferies that somewhere in the 6250 region seems like a reasonable target for this company, but that price is being informed by economic circumstances that are now behind us. If the oil price rallies back to reasonable levels, DCC will become even more attractive.
