McKesson Corp. (MCK)

(6 October 2016)

MCK Fundamentals

  • Price / Earnings: 17.22
  • Earnings Per Share: $10.59
  • Market Cap: 37.7B
  • Current Ratio: 1.07
  • Return on Equity: 26.33%
  • Dividend Yield: 0.69%
  • Debt to Capital: 38.6%

Income Statement ($ in Millions)

  • Revenues increased by $2,187.
  • Gross Profit increased by $59.
  • Dividends Declared Per Common Share increased from $0.24 to $0.28.
  • Comprehensive Income Attributable decreased by $491.

Balance Sheet ($ in Millions)

  • Total Assets increased by $1,381.
  • Total Current Liabilities increased by $1,505.
  • Long – term debt decreased $555.
  • Total Equity increased $483.

Cash Flow Statement ($ in Millions)

  • Net Cash provided by Operating Activities increased by $1,405.
  • Net Cash used in Investing Activities increased $1,137.
  • Dividends paid increased by $7.
  • Net increase in Cash & Cash Equivalents increased $317.
  • Cash & Cash Equivalents at end of period decreased by $976.

Notes from 10-Q ($ in Millions)

  • April 1, 2016 MCK acquired Vantage Oncology Holdings LLC.
  • April 1, 2016 MCK acquired Biologics, Inc.
    • This purchase was funded with cash on hand.
  • $606 and $613 of preliminary purchase price allocations for these two companies have been assigned to Goodwill.
  • January 31, 2016, sold Brazilian pharmaceutical distribution business for an after – tax loss of $113.

Notes from Q1 Fiscal 2017 Results Presentation

  • Distribution Solutions Operating Profit Margin decreased -11 bps.
  • Technology Solutions Gross Profit increased 11%
  • Technology Solutions Operating Expense decreased 10%
  • Technology Solutions Operating Profit increased 53%

 

Why You Should Buy McKesson Corp

After seeing its share price fall from $195 to $164 over the course of only three months, one might ask themselves, ‘Why such a drop?’, the next question logically would be, ‘Is this now a good buying opportunity?’. However, should you be buying MCK at its lows? Or is there a reason this stock has tumbled down and should be stayed away from. Luckily, for the value investor in mind, buying this stock is like finding your favorite pair of pants on the clearance rack.

Starting with the fundamentals, MCK is a very strong company. With ROE of nearly 27%, a fairly cheap price to earnings at $17.2, while at the same time boasting strong Earnings per Share at $10.59. And, on top of all that, MCK pays a dividend, albeit small, it’s still 0.7% that you can cash out or reinvest with. Looking at the most recent 10-Q, it’s hard to see how this company could’ve taken such a hit, and that, for the value investor, is a great thing. With profits in Technology solutions increased by upwards of 50%, expenses decreasing by 10%, long term debt being reduced, as well as an increase in dividend payout, it’s hard to imagine this stock being in the gutters. Not to mention MCK is one of the major pharmaceutical distributors, with more than $100 B in annual revenue. But it is. And this is the time to buy.

But you might be asking yourself, ‘Why is this stock so low then? What’s the deal?’. One big catalyst to this stock’s avalanche happened on Sept 15, 2016. McKesson offices were raided on a drug – pricing probe. Funny enough, since that drug probing incident, the stock has fallen $20. Now, what’s important to note is that a) they were never convicted of any illegal deals on drug pricings, they were only suspected. What does this mean for the value investor? Simple. This is a classic market overreaction to a company being probed (even though it was one of 8 that were probed) because of alleged drug deal pricings.

Thank the raiders, because at $163, MCK is a steal, with a balance sheet to propel itself back into the $185 – $190 range.

 

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