McKesson Corp (MCK, Financial) witnessed a daily loss of -2.76%, and a 3-month gain of 4.78%. With an Earnings Per Share (EPS) of 26.81, the question arises: is the stock modestly overvalued? This article presents a thorough valuation analysis of McKesson (MCK), aiming to answer this question. Read on for a comprehensive examination of the company's value.
Company Introduction
McKesson Corp is a leading pharmaceutical wholesaler in the U.S., distributing branded, generic, and specialty pharmaceutical products to various outlets. Along with AmerisourceBergen and Cardinal Health, they account for over 90% of the U.S. pharmaceutical wholesale industry. McKesson also operates in Canada and supplies medical-surgical products and technology solutions globally. The company's stock price stands at $417.76, compared to its GF Value of $345.11, suggesting a modest overvaluation.
Understanding the GF Value
The GF Value is a proprietary measure of a stock's intrinsic value, calculated considering historical trading multiples, a GuruFocus adjustment factor based on past returns and growth, and future business performance estimates. The GF Value Line represents the fair trading value of the stock. If the stock price is significantly above the GF Value Line, it is 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.
Currently, McKesson (MCK, Financial) is estimated to be modestly overvalued, with a market cap of $56.40 billion at its current price of $417.76 per share. Consequently, the long-term return of its stock is likely to be lower than its business growth.
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Financial Strength
Companies with poor financial strength pose a high risk of permanent capital loss. To avoid this, investors must review a company's financial strength before deciding to purchase shares. McKesson's cash-to-debt ratio is 0.36, ranking worse than 61.8% of companies in the Medical Distribution industry. The overall financial strength of McKesson is 7 out of 10, indicating fair financial strength.
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, is less risky. McKesson has been profitable 9 out of the past 10 years, with a revenue of $284 billion and Earnings Per Share (EPS) of $26.81 in the past twelve months. Its operating margin is 1.64%, ranking worse than 65.91% of companies in the Medical Distribution industry. However, McKesson's overall 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 revenue growth rate is 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) can 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. In the past 12 months, McKesson's ROIC was 19.87 while its WACC was 7.28.
Conclusion
In summary, the stock of McKesson Corp (MCK, Financial) is estimated to be modestly 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. To learn more about McKesson stock, you can check out its 30-Year Financials here.
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