About McKesson
Remember how we previously mentioned that we find inspiration in strange places?
Strangeness has struck again.
While hopping off of my trusty chariot, the city bus, I saw a small box truck bounce by before crossing the street with the word “McKesson” pasted on the side.
As most other normal college students, I took to the small computer in my back pocket and looked up “What is McKesson?” followed by a “What does McKesson do?”
Let us give you the rundown as this is not the first “Mc” company we’ve written a stock analysis article on.
Aside from being a company in Warren Buffett’s stock portfolio, McKesson is better known as being a major US healthcare company (headquartered in Irving, Texas) specializing in the distribution of medical supplies, pharmaceutical products, healthcare-related systems and much more.
From delivering drugs and medical instruments to vaccines and masks as well as other heavily relied upon patient solutions and products, McKesson can essentially be thought of as a medical and pharmaceutical distribution company with quite the large footprint.
Now we’re sort of curious to know what was inside the truck.
However, the past is the past and now we’re more curious about what this company and its stock has to offer prospective shareholders. Let’s get better acquainted with McKesson’s numbers and see if this is a stock to buy after the current recession or even, if the financials and macroeconomic landscape are compelling enough, before or perhaps during the recession.
McKesson’s stock financials
After glancing at the company’s stock price performance over the last five years, it’s been a great ride to the top. Specifically, the company’s share price has notched a return of almost 130% over the past half of a decade.
While we don’t really consider this to be a major make or break reason to invest in a company’s stock or not, its recent meteoric rise is worth noting for reasons that will become clear in short time.
It’s also worth noting that this doesn’t by any means imply that McKesson’s stock is going to continue rising at a similar rate or at all for that matter.
Past performance is not an indicator of future performance.
Onto some of the more pressing core metrics associated with and driving McKesson, the company currently maintains a market capitalization of $49.8 billion, a price-to-earnings (P/E) ratio of 37.32 and pays out annual dividend of $2.16 to its shareholders.
With a rise in share price at the aforementioned rate usually follows a company’s stock entering overvalued territory.
McKesson is unfortunately no exception.
The company’s current P/E ratio implies that its stock is overvalued given that a P/E of 20 is considered to signify that a company is trading at fair value or what it’s worth and anything higher means it’s overvalued.
Therefore, McKesson’s stock appears to be overvalued.
We’ve seen this in other companies we’ve analyzed and written articles on in the past and while it’s a positive for shareholders who invested a handful of years ago, it’s not so encouraging for those wanting to board the McKesson train at this point in time.
The good thing about this is that it’s not a slight to the company’s core financials or its operations; the stock price has just performed exceedingly well in recent history.
Nevertheless, although the company’s valuation is likely somewhat justified given its scale and efficiency (which we’ll touch on later), investors might want to consider sitting on the sidelines until the recession subsides.
But a prepared investor is a good investor so let’s continue learning about McKesson’s financials.
According to the company’s balance sheet, McKesson’s management team tends to around $63.3 billion in total assets paired with approximately $65.6 billion in total liabilities.
It’s somewhat rare that we see an established, dominant company such as McKesson have more total liabilities than total assets.
However, we’ve seen it in leaders of other industries before.
While the company’s total liabilities don’t outweigh its total assets by a terribly wide margin tied with the fact that this company plays heavily in the logistics business (which correspondingly tends to be debt-heavy), we’re hoping that McKesson has a strong annual net profit margin along with steady to growing revenue that will enable the company’s management to slowly and steadily chip away at its long-term debt.
Income statement here we come!
Revenue generation has not been a problem for McKesson over the past five years.
For example, the company’s total revenue in 2018 stood at around $208 billion and has since risen each year to its latest reported value of nearly $264 billion in 2022.
This is generally impressive but overall expected for a company with the industry clout and scale of McKesson.
While we don’t want it to sound like we’re just casting stones or being overly critical, we truly are impressed by the company’s ability to increase its revenues in past years.
At the same time, shareholders should expect companies at this stage to perform at high levels.
McKesson is thankfully performing well on the revenue front.
Onto the cash flow statement, the company’s net income over the past five years has generally been steady and positive aside from the outlier that was 2021. Particularly, the company experienced a net income of -$4.34 billion. To put this into perspective, the highest positive year for McKesson in terms of net income was the year that followed, 2022, which was slated at around $1.3 billion.
2021 was a big loss but it seems like a temporary one.
We say this because the company reportedly had some troubles with the Canadian consumer, a segment it subsequently exited, which we’re happy about.
McKesson, like other companies we’ve previously analyzed that have gone through similar costly missteps, is likely to continue working on the market segments it currently dominates and subsequently expanding into new markets with the problems it experienced in Canada on its mind.
As long as the company moves on and continues focusing on its core markets and internal competencies, we’re generally confident in the company’s management in that regard moving forward.
McKesson’s stock fundamentals
Now onto what we previously mentioned to be a prevailing interest of ours regarding the company, its ability to turn a profit.
On a trailing twelve month (TTM) net profit margin basis, we feel slightly deflated by McKesson’s present ability to make a profit when compared to its peers.
Some of which include medical domineers such as Walgreens, Trulieve, Stryker, Henry Schein and a few others, in case you’re as curious as we are.
Refocusing on McKesson’s lackluster TTM net profit margin, it currently stands at 0.58% to the industry’s average of 1.62%, according to TD Ameritrade’s platform.
We would’ve definitely hoped that McKesson’s net profit margin would have been at bare minimum the same as the industry.
On another somewhat disappointing note, the company’s TTM return on assets trail the industry’s average (thankfully, not by that much), however the company has been able to bag considerably higher returns on investment than its peers on average, which is a bright spot in McKesson’s overall financial picture.
Should you buy McKesson stock?
McKesson itself is quite an important company that has served and continues to serve a very important purpose and role in society as a whole.
Aside from that, the numbers behind this company aren’t as good as we originally thought they’d be. While the company has reported strong revenues, their net profit margin is a little too low for our liking and the stock itself is overvalued on a strict price-to-earnings basis.
Given all of this information we give the company a “sell” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.