McKesson Corp (MCK, Financial) has recently experienced a daily loss of -1.26%, yet it boasts a 3-month gain of 12.99%. With an impressive Earnings Per Share (EPS) of 25.31, investors are keen to understand whether the stock is justifiably valued. The question arises: Is McKesson modestly overvalued? The following valuation analysis aims to shed light on this query, inviting readers to delve into the financial intricacies of McKesson (MCK).
McKesson Corp (MCK, Financial) is a pharmaceutical powerhouse, playing a crucial role in the U.S. healthcare sector. As one of the top three pharmaceutical wholesalers in the nation, McKesson's business extends from drug distribution to providing vital medical supplies and technology solutions. The company's dominance is not limited to the U.S.; it also has a significant presence in the Canadian pharmaceutical wholesale market. With a current share price of $464.65 and a Fair Value (GF Value) estimated at $369.37, it's essential to scrutinize whether McKesson's market valuation aligns with its intrinsic value.
Understanding the GF Value
The GF Value is a proprietary metric that calculates the intrinsic value of a stock by considering historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. When a stock's price significantly exceeds the GF Value Line, it may be overvalued, suggesting potential lackluster future returns. Conversely, a price well below the line could indicate undervaluation and the prospect of higher future returns.
McKesson (MCK, Financial) appears modestly overvalued according to GuruFocus' exclusive valuation method. The stock's market cap of $61.80 billion, juxtaposed with its GF Value, suggests that the stock might not offer the same growth potential as its underlying business. This discrepancy could lead to lower long-term returns for investors.
Financial Strength and Stability
Before investing, assessing a company's financial strength is crucial to avoid the risk of permanent loss. McKesson's financial strength is rated 7 out of 10, which is fair, but its cash-to-debt ratio of 0.35 is lower than 61.8% of its peers in the Medical Distribution industry. This figure reflects the company's ability to cover its debt with available cash, a vital indicator of financial health.
Profitability and Growth Prospects
Investing in consistently profitable companies is generally less risky. McKesson has been profitable 9 out of the past 10 years, with revenues of $291.10 billion and an Earnings Per Share (EPS) of $25.31. However, its operating margin of 1.55% is lower than 64.13% of the companies in its industry. Despite this, McKesson's profitability is considered strong by GuruFocus standards.
Growth is a critical component of a company's valuation. McKesson's 3-year average revenue growth rate surpasses 79.76% of its industry counterparts, and its EBITDA growth rate is in the top 90%. These figures underscore the company's potential to create shareholder value through profitable expansion.
ROIC vs. WACC: A Measure of Profitability
Comparing Return on Invested Capital (ROIC) to the Weighted Average Cost of Capital (WACC) offers insight into a company's profitability relative to the capital invested. Ideally, ROIC should exceed WACC. McKesson's ROIC is an impressive 19.45, significantly higher than its WACC of 7.12, indicating efficient capital utilization.
In summary, McKesson (MCK, Financial) presents signs of modest overvaluation. The company's financial condition is fair, and its profitability is robust. Its growth outperforms a majority of competitors in the Medical Distribution industry. For a more detailed understanding of McKesson's financials, 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.