Growth stocks have been hammered this year due to macroeconomic and geopolitical uncertainties. However, healthcare services provider McKesson Corporation (MCK) has been an outlier. The stock has gained 52.1% in price year-to-date and 68.8% over the past year to close the last trading session at $378.04.
MCK has been the second-best performing non-energy stock in the S&P 500 this year after Cardinal Health Inc. (CAH). MCK’s revenue grew at a CAGR of 7% over the past three years. The company’s EBIT grew at a CAGR of 3.3% over the past three years.
MCK missed the consensus EPS estimate by 0.7% in the last quarter. However, its revenue beat analyst estimates by 0.2%. The company raised its outlook for fiscal 2023. It expects its adjusted EPS to come between $24.45 and $24.95 versus the $23.95 to $24.65 expected earlier.
World-famous investor Warren Buffett also seems bullish on MCK’s prospects. Buffett’s Berkshire Hathaway picked up 2.92 million shares of MCK in the first quarter and added 276K more in the second quarter.
The company is expected to pay a quarterly dividend of $0.54 on January 3, 2023. Its annual dividend of $2.16 yields 0.56% on the current share price. It has a four-year average yield of 0.94%.
Its dividend payouts have increased at an 8.1% CAGR over the past three years and a 10.3% CAGR over the past five years. The company has grown its dividend payments for 15 consecutive years.
Wall Street analysts expect the stock to hit $425.73 in the near term, indicating a potential upside of 12.6%.
Here’s what could influence MCK’s performance in the upcoming months:
Strategic Acquisition
On September 19, 2022, MCK announced that it had signed an agreement to acquire Rx Savings Solutions (RxSS). MCK’s CEO Brian Tyler said, “We expect the acquisition of Rx Savings Solutions to accelerate McKesson’s growth priority in biopharma services by extending our ecosystem of differentiated medication access solutions to patients.”
Robust Financials
MCK’s revenues increased 5.4% year-over-year to $70.15 billion for the second quarter ended September 30, 2022. The company’s operating income increased 108.5% year-over-year to $1.12 billion.
For the six months ended September 30, 2022, MCK’s cash and cash equivalents at the end of the period increased 35.6% year-over-year to $2.91 billion. Its net income attributable to MCK increased 247% year-over-year to $926 million.
Favorable Analyst Estimates
MCK’s EPS for fiscal 2023 and 2024 is expected to increase 4.4% and 6.5% year-over-year to $24.74 and $26.34, respectively. Its revenue for fiscal 2023 and 2024 is expected to increase 4.5% and 3.8% year-over-year to $275.87 billion and $286.46 billion, respectively.
Discounted Valuation
In terms of forward non-GAAP P/E, MCK's 15.28x is 22.1% lower than the 19.61x industry average. Its forward P/S of 0.19x is 95.6% lower than the 4.35x industry average. Also, the stock's 11.22x trailing-12-month EV/EBITDA is 17.4% lower than the 13.58x industry average.
High Profitability
MCK’s trailing-12-month net income margin is 0.76% compared to the negative industry average. Likewise, its trailing-12-month EBIT margin is 1.20%, compared to the negative industry average. Furthermore, the stock’s trailing-12-month levered FCF margin is 1.37% compared to the negative industry average.
POWR Ratings Show Promise
MCK has an overall rating of A, which equates to a Strong Buy in our POWR Ratings system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. MCK has a B grade for Value, consistent with its discounted valuation.
It has a B grade for Quality, in sync with its high profitability. In addition, its favorable analyst estimates justify its B grade for Sentiment.
MCK is ranked first out of 79 stocks in the Medical – Services industry. Click here to access MCK’s Growth, Momentum, and Stability ratings.
Bottom Line
Despite the underperformance of the growth stocks this year, MCK is trading above its 50-day and 200-day moving averages of $368.57 and $335.46, respectively, indicating an uptrend. The company’s stability can be gauged from the fact that it has raised its dividends for 15 consecutive years. Its acquisition of Rx Savings Solutions will help maintain its growth in biopharma services.
Given its robust financials, strong growth, solid dividend payouts, favorable analyst estimates, high profitability, and discounted valuation, it could be wise to buy this growth stock.
How Does McKesson Corporation (MCK) Stack up Against Its Peers?
MCK has an overall POWR Rating of A, equating to a Strong Buy rating. Check out these other stocks within the Medical - Services industry with an A (Strong Buy) or (Buy) rating: HealthStream, Inc. (HSTM), AmerisourceBergen Corporation (ABC), and Addus HomeCare Corporation (ADUS).
MCK shares were trading at $383.72 per share on Wednesday morning, up $5.68 (+1.50%). Year-to-date, MCK has gained 55.30%, versus a -16.00% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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