With a daily gain of 4.41% and an Earnings Per Share (EPS) of 25.05, McKesson Corp (MCK, Financial) has caught the attention of investors. However, is the stock significantly overvalued? This article will delve into a comprehensive valuation analysis of McKesson. Stay with us as we unpack the details.
Company Overview
McKesson Corp is a leading pharmaceutical wholesaler in the U.S., specializing in sourcing and distributing branded, generic, and specialty pharmaceutical products. The company serves a broad client base, including retail chains, independent and mail-order pharmacies, hospital networks, and healthcare providers. McKesson, alongside AmerisourceBergen and Cardinal Health, accounts for over 90% of the U.S. pharmaceutical wholesale industry. Beyond the U.S., the company also operates in Canada. McKesson also supplies medical-surgical products and equipment to healthcare facilities and provides various technology solutions for pharmacies.
Currently, McKesson (MCK, Financial) is trading at $431.27 per share, with a market cap of $58.4 billion, which is considerably higher than its GF Value of $279.95. This disparity prompts a deeper look into the company's valuation.
Understanding the GF Value
The GF Value is a proprietary measure developed by GuruFocus to estimate a stock's intrinsic value. This measure considers historical trading multiples, a GuruFocus adjustment factor based on past returns and growth, and future business performance estimates. The GF Value Line provides an ideal fair trading value for the stock.
According to our GF Value calculation, McKesson (MCK, Financial) appears to be significantly overvalued. This is based on the stock's historical trading multiples, past business growth, and future performance estimates. If a stock's price is significantly above the GF Value Line, it is considered 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.
Given that McKesson is significantly overvalued, its long-term stock return is likely to be much lower than its future business growth.
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McKesson's Financial Strength
Investing in companies with poor financial strength can increase the risk of permanent capital loss. Thus, it's crucial to review a company's financial strength before purchasing its stock. McKesson's cash-to-debt ratio of 0.64 is worse than 53.93% of companies in the Medical Distribution industry. However, GuruFocus ranks the overall financial strength of McKesson at 7 out of 10, indicating fair financial health.
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, is typically less risky. McKesson has been profitable 9 out of the past 10 years. Over the past twelve months, the company had a revenue of $276.7 billion and Earnings Per Share (EPS) of $25.05. However, its operating margin of 1.66% ranks worse than 65.91% of companies in the Medical Distribution industry. Overall, McKesson's profitability is ranked 8 out of 10, indicating strong profitability.
Growth is a crucial factor in the valuation of a company. McKesson's 3-year average annual revenue growth rate is 15.2%, which ranks better than 80.25% of companies in the Medical Distribution industry. Its 3-year average EBITDA growth rate is 44.6%, ranking better than 90% of companies in the industry.
ROIC vs WACC
Comparing a company's Return on Invested Capital (ROIC) to its Weighted Average Cost of Capital (WACC) is another way to evaluate its profitability. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, McKesson's ROIC was 18.14, while its WACC came in at 7.
Conclusion
In conclusion, McKesson Corp (MCK, Financial) appears to be significantly overvalued. The company's financial condition is fair, and its profitability is strong. Its growth ranks better than 90% of companies in the Medical Distribution industry. For more information about McKesson stock, check out its 30-Year Financials here.
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