Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing 5 Undervalued Companies for the Enterprising Investor. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how McKesson Corp (MCK) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): McKesson Corporation delivers pharmaceuticals, medical supplies and healthcare information technologies. The Company operates in two segments: McKesson Distribution Solutions segment and McKesson Technology Solutions segment. The McKesson Distribution Solutions segment distributes drugs, medical-surgical supplies and equipment and health and beauty care products throughout North America. The McKesson Technology Solutions segment delivers enterprise clinical, patient care, financial, supply chain, strategic management software solutions, pharmacy automation for hospitals, as well as connectivity, outsourcing and other services, including remote hosting and managed services, to healthcare organizations. In February 2013, the Company completed acquisition of Pss World Medical Inc. In February 2014, McKesson Corporation announced that its ownership in Celesio AG exceeds 75% interest.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$90.94|
|Value Based on 0% Growth||$53.31|
|Market Implied Growth Rate||9.96%|
|Net Current Asset Value (NCAV)||-$13.99|
Balance Sheet – 12/31/2013
Earnings Per Share
Earnings Per Share – ModernGraham
McKesson Corp is not suitable for either the Defensive Investor or the Enterprising Investor. The Defensive Investor has concerns with the low current ratio, lack of earnings stability over the last ten years, and the high PEmg and PB ratios, while the Enterprising Investor is concerned with the high level of debt relative to the current assets. As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities through a review of Cardinal Health (CAH) and 5 Undervalued Companies for the Defensive Investor. From a valuation side of things, the company appears fairly valued after growing its EPSmg (normalized earnings) from $3.57 in 2010 to $6.27 for 2014. This level of demonstrated growth supports the market’s implied estimate of 9.96% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls within a margin of safety relative to the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on McKesson Corp (MCK)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
If you like our valuations, why not check out ModernGraham Stocks & Screens? It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!
Disclaimer: The author did not hold a position in McKesson Corp (MCK) or in any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from wikipedia; this article is not affiliated with the company in any manner.