With an end to the Federal Reserve’s interest rate hikes not in sight, an economic slowdown increasingly seems like a matter of “when” rather than an “if” on Wall Street.
Amid widespread bearish sentiments, it could be wise to bank on fundamentally strong, profitable, and fairly-priced businesses that provide essential services and hence enjoy demand and margin relatively immune to an economic slowdown.
McKesson Corporation (MCK) is a diversified healthcare service provider focusing on advancing patients’ health outcomes globally. The company operates through four segments: U.S. Pharmaceutical, Prescription Technology Solutions (RxTS), Medical-Surgical Solutions, and International. MCK, along with AmerisourceBergen Corporation (ABC) and Cardinal Health, Inc. (CAH), dominate the medical distribution space.
MCK’s leadership position in the industry, sustainable business model, and enduring competitive advantages have earned it a coveted place in the portfolio of Berkshire Hathaway Inc. (BRK). The Omaha-headquartered conglomerate led by the legendary investor Warren Buffett held a 2.3% stake in MCK as of September 30, 2022.
The stock has gained 16% over the past six months and 51.3% over the past year to close the last trading session at $374.05, above its 200-day moving average of $345.58.
Let’s closely examine the factors that make it worthy of investment.
Positive Recent Developments
On September 29, MCK announced that it had extended its pharmaceutical distribution agreement with CVS Health (CVS) through June 2027. MCK and CVS have been partnering to develop patient value propositions for over 20 years.
On September 19, MCK signed a definitive agreement to acquire Rx Savings Solutions (RxSS), a prescription price transparency and benefit insight company. The acquisition, valued at a maximum of $875 million, aligns with McKesson’s strategic growth focus by connecting biopharma and payer services to patients.
Solid Financials
In the fiscal 2022 second quarter ended September 30, 2022, MCK’s total revenues increased 5.4% year-over-year to $70.16 billion, primarily driven by growth in the U.S. Pharmaceutical segment, resulting from increased specialty product volumes.
During the same period, its income from continuing operations increased 249.1% year-over-year to $932 million, while EPS increased 277.8% year-over-year to $6.46.
Optimistic Analyst Estimates
Analysts expect MCK to report revenue and EPS of $275.60 billion and $24.77 for the fiscal year ending March 2023, indicating increases of 4.4% and 4.6% year-over-year, respectively. Both metrics are expected to keep increasing over the next two fiscals to come in at $300.25 and $29.68 for the fiscal year ending March 2025.
Increasing Dividend Payouts
On January 3, MCK paid its regular quarterly dividend of $0.54 per share of common stock. The company pays $2.16 annually as dividends, which translates to a yield of 0.58% at the current price.
MCK has increased its dividend payouts for 15 consecutive years and at a 10.3% CAGR over the past five years. With just 8.17% of its earnings currently paid out as dividends, the company has adequate resources at its disposal to reinvest, service its debts, and repurchase outstanding shares to keep increasing its earnings and, consequently, its dividend payouts in the foreseeable future.
Attractive Valuations
In terms of its forward P/E, MCK is trading at 15.10x, slightly lower than the industry average of 18.95x. The stock’s forward EV/EBITDA multiple of 10.96 is 17.6% lower than the industry average of 13.30.
Moreover, MCK’s forward Price/Sales multiple of 0.19 is 95.7% lower than the industry average of 4.45.
Excellent Capital Allocation by Management
MCK’s trailing 12-month net income margin of 0.76% compares favorably with the industry average of negative 5.94%. With huge volumes and a substantial revenue base, the company has been generating significant earnings while keeping margins low to expand its market share and secure its leadership in the medical distribution domain.
Additionally, the company’s trailing-12-month ROTC and ROTA of 29.18% and 3.26% comfortably surpass the industry averages of negative 21.95% and 31.06%, respectively.
POWR Ratings Reflect Promising Prospects
MCK’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 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 also has an A grade for Growth, consistent with optimistic analyst estimates.
Moreover, the stock has grade B for Stability, Quality, and Value, in sync with its relatively low beta of 0.62, decent asset utilization statistics, and attractive valuations.
Unsurprisingly, MCK tops the list of 77 stocks in the Medical - Services industry.
Click here to see the additional POWR Ratings for MCK’s Momentum and Sentiment.
Bottom Line
In addition to MCK’s attractive valuations, capital discipline, and impressive growth prospects, its stable and steadily increasing customer base and market share, due to increasing life expectancies, make it an attractive investment option for solid risk-adjusted returns.
How Does McKesson Corporation (MCK) Stack up Against Its Peers?
While MCK tops its industry group and has an overall POWR Rating of A, which equates to a Strong Buy, investors could also consider looking at its A-rated industry peers: AmerisourceBergen Corporation (ABC), Cardinal Health, Inc. (CAH), and HealthStream, Inc. (HSTM).
MCK shares were trading at $385.09 per share on Friday afternoon, up $11.04 (+2.95%). Year-to-date, MCK has gained 2.66%, versus a 1.55% rise in the benchmark S&P 500 index during the same period.
About the Author: Santanu Roy
Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.
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