McKesson Corp Valuation – August 2017 $MCK

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 the 10 Undervalued Stocks for the Enterprising Investor – August 2017.  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 stock analysis showing a specific look at how McKesson Corp (MCK) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): McKesson Corporation (McKesson) is engaged in delivering pharmaceuticals, medical supplies and healthcare information technology. The Company operates through two segments: McKesson Distribution Solutions and Technology Solutions. The McKesson Distribution Solutions segment distributes drugs and equipment, and health and beauty care products across North America and internationally. The Distribution Solutions segment provides pharmaceutical solutions for biotech and pharmaceutical manufacturers, and practice management, technology, clinical support and business solutions to oncology and other specialty practices operating in the community setting. The Technology Solutions segment delivers clinical, patient care, financial, supply chain and strategic management software solutions, as well as connectivity, outsourcing and other services. Its McKesson Health Solutions portfolio includes ClarityQx, which is a payment technology.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of MCK – August 2017

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $30,948,246,599 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 1.05 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 268.04% Pass
6. Moderate PEmg Ratio PEmg < 20 11.08 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 2.77 Pass
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 1.05 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 3.91 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

EPSmg $13.28
MG Growth Estimate 15.00%
MG Value $511.33
Opinion Undervalued
MG Grade B
MG Value based on 3% Growth $192.58
MG Value based on 0% Growth $112.89
Market Implied Growth Rate 1.29%
Current Price $147.19
% of Intrinsic Value 28.79%

McKesson Corporation qualifies for both the Defensive Investor and the Enterprising Investor.  The Defensive Investor is only initially concerned with the  low current ratio. The Enterprising Investor has concerns regarding the level of debt relative to the current assets.  As a result, all value investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $5.33 in 2014 to an estimated $13.28 for 2018.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 1.29% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into McKesson Corporation revealed the company was trading above its Graham Number of $120.39.  The company pays a dividend of $1.12 per share, for a yield of 0.8%  Its PEmg (price over earnings per share – ModernGraham) was 11.08, which was below the industry average of 48.5, which by some methods of valuation makes it one of the most undervalued stocks in its industry.  Finally, the company was trading above its Net Current Asset Value (NCAV) of $-60.17.

McKesson Corporation performs fairly well in the ModernGraham grading system, scoring a B.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$60.17
Graham Number $120.39
PEmg 11.08
Current Ratio 1.05
PB Ratio 2.77
Current Dividend $1.12
Dividend Yield 0.76%
Number of Consecutive Years of Dividend Growth 4


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Most Recent Balance Sheet Figures

Balance Sheet Information 6/1/2017
Total Current Assets $37,697,000,000
Total Current Liabilities $35,799,000,000
Long-Term Debt $7,424,000,000
Total Assets $61,816,000,000
Intangible Assets $15,988,000,000
Total Liabilities $50,513,000,000
Shares Outstanding (Diluted Average) 213,000,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $12.25
Mar2017 $22.73
Mar2016 $9.70
Mar2015 $6.27
Mar2014 $5.41
Mar2013 $5.59
Mar2012 $5.59
Mar2011 $4.57
Mar2010 $4.62
Mar2009 $2.95
Mar2008 $3.32
Mar2007 $2.99
Mar2006 $2.38
Mar2005 -$0.53
Mar2004 $2.19
Mar2003 $1.88
Mar2002 $1.43
Mar2001 -$0.17
Mar2000 $2.55
Mar1999 $0.31
Mar1998 $1.10

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $13.28
Mar2017 $12.51
Mar2016 $7.11
Mar2015 $5.70
Mar2014 $5.33
Mar2013 $5.08
Mar2012 $4.62
Mar2011 $3.99
Mar2010 $3.55
Mar2009 $2.75
Mar2008 $2.46
Mar2007 $1.94
Mar2006 $1.44
Mar2005 $0.96
Mar2004 $1.66
Mar2003 $1.33
Mar2002 $1.06

Recommended Reading:

Other ModernGraham posts about the company

47 Companies in the Spotlight This Week – 5/16/15
McKesson Corporation Annual Valuation – 2015 $MCK
18 Companies in the Spotlight This Week – 5/17/14
McKesson Corp (MCK) Annual Valuation – 2014

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The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.






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