As of September 07, 2023, McKesson Corp (MCK, Financial) has seen a daily gain of 1.92%, and a 3-month gain of 8.6%. Its Earnings Per Share (EPS) stands at 26.81. But is the stock modestly overvalued? This article aims to answer this question through a detailed valuation analysis. Read on to understand the intrinsic value of McKesson (MCK).
A Glimpse into McKesson Corp
McKesson Corp is a leading pharmaceutical wholesaler in the U.S., engaged in sourcing and distributing branded, generic, and specialty pharmaceutical products. The company has a significant presence in the pharmaceutical wholesale industry, both domestically and in Canada. In addition to pharmaceuticals, McKesson also supplies medical-surgical products and equipment to healthcare facilities and provides a variety of technology solutions for pharmacies.
With its current stock price at $419.16, the company's valuation according to GF Value is estimated at $347.5, suggesting that the stock might be modestly overvalued.
Understanding the GF Value of McKesson
The GF Value is a proprietary measure of a stock's intrinsic value, calculated based on historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line indicates the ideal fair trading value of the stock.
According to the GF Value, McKesson (MCK, Financial) appears to be modestly overvalued. If the stock price is significantly above the GF Value Line, the stock is likely overvalued and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $ 419.16 per share, McKesson stock appears to be modestly overvalued.
Given that McKesson is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth.
McKesson's Financial Strength
Companies with poor financial strength pose a high risk of permanent capital loss. To avoid this, it's crucial to review a company's financial strength before purchasing shares. Key indicators of financial strength include the cash-to-debt ratio and interest coverage. McKesson has a cash-to-debt ratio of 0.36, which ranks worse than 59.77% of 87 companies in the Medical Distribution industry. The overall financial strength of McKesson is 7 out of 10, indicating fair financial strength.
Profitability and Growth of McKesson
Consistent profitability over the long term offers less risk for investors. Higher profit margins usually indicate a better investment compared to a company with lower profit margins. McKesson has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $284 billion and an Earnings Per Share (EPS) of $26.81. Its operating margin is 1.64%, which ranks worse than 64.77% of 88 companies in the Medical Distribution industry. Overall, the profitability of McKesson is ranked 8 out of 10, indicating strong profitability.
Growth is a crucial factor in the valuation of a company. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of McKesson is 15.2%, which ranks better than 79.01% of 81 companies in the Medical Distribution industry. The 3-year average EBITDA growth rate is 44.6%, which ranks better than 89.71% of 68 companies in the Medical Distribution industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to its weighted average cost of capital (WACC) can also evaluate its profitability. ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC exceeds the WACC, the company is likely creating value for its shareholders. During the past 12 months, McKesson's ROIC is 19.87 while its WACC came in at 7.36.
Conclusion
In summary, the stock of McKesson (MCK, Financial) appears to be modestly overvalued. The company's financial condition is fair, and its profitability is strong. Its growth ranks better than 89.71% of 68 companies in the Medical Distribution industry. To learn more about McKesson stock, you can check out its 30-Year Financials here.
To find out the high-quality companies that may deliver above-average returns, please check out GuruFocus High Quality Low Capex Screener.
