The stock market has had a challenging year due to macroeconomic and geopolitical headwinds. Inflation is near multi-decade high levels, and the job market has been tight. The Federal Reserve has maintained a hawkish stance so far to control the runaway inflation.
Earlier this month, the Fed announced its fourth consecutive 75-basis-point rate hike to achieve its long-term inflation target. Although the recent jobs data released by the Labor Department revealed that unemployment rose marginally to 3.7% last month from 3.5% in September, it is finally showing initial signs of cooling down.
Employers added a seasonally adjusted 261,000 jobs in October, but it was the fewest since December 2020. The unemployment rate rose by 3.7%. The Fed Chair hinted at potential slower rate hikes in the future but later said, “We still have some ways to go, and incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected.”
Although the aggressive rate hikes have stoked recession fears, the U.S. economy’s GDP increased at an annual rate of 2.6% in the third quarter after a 0.6% contraction in the second quarter.
Amid this uncertainty, investors looking for fundamentally strong stocks with solid growth prospects could consider buying McKesson Corporation (MCK) and Flowers Foods, Inc. (FLO) to their portfolios this quarter.
McKesson Corporation (MCK)
MCK provides healthcare supply chain management, retail pharmacy, community oncology, specialty care, and healthcare information solutions. The company is focused on distributing pharmaceuticals and providing health information technology, medical supplies, and care management tools.
MCK operates in the U.S. Pharmaceuticals, International, Medical-Surgical Solutions, and Prescription Technology Solutions segments.
On September 19, 2022, MCK announced that it had signed a definitive agreement to acquire prescription price transparency and benefit insight company Rx Savings Solutions (RxSS).
MCK 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. Together with Rx Savings Solutions, Mckesson will amplify our efforts to advance health outcomes for all.”
Over the last three years, MCK’s dividend payouts have grown at a 7.3% CAGR. Its four-year average dividend yield is 1%, and its current dividend translates to a 0.5% yield. It is expected to pay a quarterly dividend of $0.54 per share on January 3, 2023.
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’s revenues for the second quarter ended September 30, 2022, increased 5.4% year-over-year to $70.15 billion. Its operating income increased 108.5% year-over-year to $1.12 billion. The company’s adjusted earnings came in at $874 million. Also, its non-GAAP EPS came in at $6.06.
Analysts expect MCK’s EPS and revenue for the quarter ending December 31, 2022, to increase 3.3% and 3.6% year-over-year to $6.35 and $71.12 billion, respectively. Over the past year, the stock has gained 77.8% to close the last trading session at $396.65.
MCK’s strong fundamentals are reflected in its POWR Ratings. It 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.
It has an A grade for Growth and a B for Value, Stability, Sentiment, and Quality. It is ranked first out of 78 stocks in the Medical – Services industry. Click here to see the rating of MCK for Momentum.
Flowers Foods, Inc. (FLO)
FLO produces and markets packaged bakery products in the United States. It offers fresh bread, buns, rolls, snack cakes, tortillas, frozen bread, and rolls under the Nature’s Own, Dave’s Killer Bread, Wonder, Canyon Bakehouse, Mrs. Freshley’s, and Tastykake brand names.
On July 12, 2022, FLO announced that it had invested in Base Culture, gluten and grain-free sliced bread and baked goods maker. The investment will allow FLO to grow its offerings and revenues.
Over the last three years, FLO’s dividend payouts have grown at a 5.1% CAGR. Its four-year average dividend yield is 3.3%, and its current dividend translates to a 3% yield. It paid a quarterly dividend of $0.22 per share on September 16, 2022.
FLO’s revenue grew at a CAGR of 4.2% over the past three years. The company’s EBITDA grew at a CAGR of 5.8% over the past three years.
FLO’s sales increased 11% year-over-year to $1.13 billion for the second quarter that ended July 16, 2022. For 28 weeks ended July 16, 2022, FLO’s adjusted EBITDA rose 0.6% year-over-year to $285.44 million, and its adjusted net income increased 1.2% year-over-year to $158.34 million.
Analysts expect FLO’s EPS for the fourth quarter (ending December 2022) to increase 23.8% year-over-year to $0.25. Its revenue for the third quarter (ended September 2022) is expected to increase 10.8% year-over-year to $1.14 billion. It surpassed Street EPS estimates in three of the trailing four quarters. Over the past year, the stock has gained 12.9% to close the last trading session at $28.52.
FLO’s POWR Ratings reflect this promising outlook. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
It has an A grade for Growth and a B for Quality. It is ranked #10 out of 86 stocks in the B-rated Food Makers industry. Click here to see the other ratings of FLO for Value, Momentum, Stability, and Sentiment.
MCK shares were trading at $394.89 per share on Monday morning, down $1.76 (-0.44%). Year-to-date, MCK has gained 59.60%, versus a -19.89% 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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