McKesson Corp (MCK, Financial) recently showed a daily gain of 1.2%, complementing a 3-month gain of 6.54%. With an impressive Earnings Per Share (EPS) of $25.31, investors may wonder if the stock is keeping pace with its intrinsic value. The critical question at hand is whether McKesson (MCK), with a current stock price of $462.98, is modestly overvalued. The following analysis delves into McKesson's financials and market position to provide a clear valuation perspective.
Company Overview
McKesson Corp (MCK, Financial) stands as a titan in the U.S. pharmaceutical wholesale industry, accounting for over 90% of the market alongside Cencora and Cardinal Health. Its operations span from distributing pharmaceutical products to various healthcare providers to offering technological solutions for pharmacies. With a significant presence in Canada as well, McKesson's role extends beyond the U.S. borders. A comparison between McKesson's stock price and the GF Value of $357.67 suggests a need to scrutinize its fair market value further.
Understanding GF Value
The GF Value is a proprietary measure that estimates the intrinsic value of a stock like McKesson (MCK, Financial). It incorporates historical trading multiples, a GuruFocus adjustment factor based on past performance, and future business performance estimates. If McKesson's share price significantly surpasses the GF Value Line, it may suggest an overvalued stock with potentially lower future returns. Conversely, a price well below the GF Value Line could indicate a stock that's undervalued with higher future returns. Currently, with a market cap of $61.60 billion, McKesson appears modestly overvalued.
Given its valuation, the long-term return of McKesson's stock might be less than its business growth trajectory. This assessment is crucial for investors looking for sustainable performance aligned with business fundamentals.
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Financial Strength and Stability
Understanding a company's financial strength is vital in mitigating the risk of permanent capital loss. McKesson's cash-to-debt ratio of 0.35 ranks lower than 61.29% of its industry peers, indicating some areas for scrutiny. Nonetheless, with an overall financial strength rating of 7 out of 10, McKesson's financial stability is considered fair.
Profitability and Growth Prospects
Investing in profitable companies, especially those with a history of consistent profitability, is generally less risky. McKesson has maintained profitability for 9 out of the past 10 years, with a revenue of $291.10 billion and an operating margin of 1.55%. This performance, coupled with a strong profitability rank of 8 out of 10, showcases McKesson's robust profitability.
Growth is a pivotal factor in a company's valuation. McKesson's 3-year average annual revenue growth of 15.2% outpaces 77.91% of companies in its industry, while its EBITDA growth rate of 44.6% surpasses 90.28% of its peers, underscoring its strong growth potential.
ROIC vs. WACC Analysis
Comparing Return on Invested Capital (ROIC) to the Weighted Average Cost of Capital (WACC) provides insight into McKesson's profitability in relation to its invested capital. With an ROIC of 19.45 and a WACC of 5.65 over the past 12 months, McKesson is effectively creating value for its shareholders.
Conclusion
In summary, McKesson (MCK, Financial) is currently seen as modestly overvalued. Nevertheless, the company's solid financial health and strong profitability, alongside its promising growth, make it a noteworthy consideration for investors. To gain a deeper understanding of McKesson's financial journey, interested parties can explore its 30-Year Financials here.
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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
