McKesson Corp (MCK, Financial) experienced a daily gain of 1.31%, with a 3-month gain of 5.17%. The company also reported an Earnings Per Share (EPS) (EPS) of 26.81. These figures raise an important question: is McKesson's stock modestly overvalued? This article aims to provide a comprehensive valuation analysis of McKesson. Let's delve into the details.
Company Introduction
McKesson Corp is a leading pharmaceutical wholesaler in the U.S., primarily involved in sourcing and distributing branded, generic, and specialty pharmaceutical products. The company serves a wide range of clients, including retail chains, independent pharmacies, mail order pharmacies, hospital networks, and healthcare providers. Alongside Cencora and Cardinal Health, McKesson accounts for over 90% of the U.S. pharmaceutical wholesale industry. The company also has a significant presence in Canada. Additionally, McKesson supplies medical-surgical products and equipment to healthcare facilities and offers various technology solutions for pharmacies.
McKesson's stock price currently stands at $425.62, which is above its GF Value of $348.76. This discrepancy suggests that the stock might be modestly overvalued. To understand this better, let's explore the company's value in more depth.
Summarizing GF Value
The GF Value is a proprietary measure that represents the current intrinsic value of a stock. It's calculated based on historical multiples, a GuruFocus adjustment factor, and future estimates of business performance. The GF Value Line provides an overview of the fair value at which the stock should ideally be traded.
According to our valuation method, McKesson's stock appears to be modestly overvalued. The current price of $425.62 per share gives McKesson a market cap of $57.40 billion. Consequently, the long-term return of its stock is likely to be lower than its business growth.
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Financial Strength
Investing in companies with poor financial strength can lead to a higher risk of permanent loss of capital. Therefore, it's crucial to carefully review a company's financial strength before purchasing its stock. McKesson's cash-to-debt ratio stands at 0.36, which is lower than 60.47% of 86 companies in the Medical Distribution industry. This gives McKesson a financial strength rank of 7 out of 10, indicating fair financial strength.
Profitability and Growth
Consistent profitability over the long term reduces the risk for investors. McKesson has been profitable 9 out of the past 10 years, with a revenue of $284 billion and an EPS of $26.81 over the past twelve months. However, its operating margin of 1.64% ranks lower than 64.77% of 88 companies in the Medical Distribution industry. Despite this, McKesson's overall profitability is ranked 8 out of 10, indicating strong profitability.
Growth is a crucial factor in a company's valuation. McKesson's 3-year average annual revenue growth is 15.2%, ranking better than 79.01% of 81 companies in the Medical Distribution industry. Its 3-year average EBITDA growth rate is 44.6%, which ranks better than 89.86% of 69 companies in the same industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to its weighted average cost of capital (WACC) can also provide insights into its profitability. McKesson's ROIC is 19.87, exceeding its WACC of 7.35. This suggests that the company is likely creating value for its shareholders.
Conclusion
In conclusion, McKesson's stock appears to be modestly overvalued. The company exhibits fair financial strength and strong profitability. Its growth ranks better than most companies in the Medical Distribution industry. For more information about McKesson's stock, check out its 30-Year Financials here.
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