McKesson Stock Is Skyrocketing - Is It Too Hot to Handle?

McKesson (MCK) stock climbed 3.19 % this premarket. According to our metrics, the company seems fairly valued at today's prices. In the below analysis, we will put McKesson's valuation in the context of its mixed growth prospects and mixed market sentiment, which are also strong drivers for share price.

McKesson Corporation is an American company distributing pharmaceuticals and providing health information technology, medical supplies, and care management tools. The large-cap Health Care company is based in Irving, United States.

MCK's P/E Ratio Is Better Than the Sector Average

Compared to the Health Care sector's average of 24.45, McKesson has a trailing twelve month price to earnings (P/E) ratio of 15.43 and an expected P/E ratio of 13.11. P/E ratios are calculated by dividing the company's share price by its trailing 12 month or forward earnings per share, which stand at $22.46 and $26.44 respectively.

Earnings represent the net profits left over after subtracting costs of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since McKesson's P/E ratio is lower than its sector average, we can deduce that the market is undervaluing the company's earnings.

McKesson Is Fairly Valued in Terms of Expected Growth

Another factor pointing to McKesson's value is its PEG ratio of 0.617. This is the stock's price to earnings ratio divided by its estimated earnings growth rate. If the resulting ratio is near or lower than 1 -- but higher than 0 -- its indicates that the company is faitly valued in terms of expected growth.

MCK Has an Alarming P/B Ratio

The price to book (P/B) ratio of a company is a comparison of the company's market capitalization versus its net asset, or book value. A ratio lower than 1 tells you that the equity market is undervaluing the book value of the company's assets, and ratios higher than 1 tell you that the equity markets are overvaluing the company in terms of its assets.

Of course, a company is worth much more than its assets alone, so the focus on P/B ratio is mainly to enable investors to single out undervalued securities that offer a margin of safety. Since McKesson's P/B ratio of 5.04 is higher than its sector average of 4.16, such a margin of safety does not exist for the stock.

Investors Stand to Gain from MCK's Cash Flows

McKesson has strong cash flows. With a coefficient of variability of 5% and an average growth rate of 0.88%, the company is effectively turning its revenue into cash. We calculate McKesson's free cash flows by subtracting capital expenditures (long term investments in the business) from its total cash flows from operations. The table below shows us that capital expenditures are evolving at a -0.6% rate, versus 0.54% for operating expenses:

Date Reported Cash Flow from Operations (k) Capital Expenditures (k) Free Cash Flow (k) YoY Growth
2022-03-31 $4,434,000 $535,000 $3,899,000 -0.05%
2021-03-31 $4,542,000 $641,000 $3,901,000 0.85%
2020-03-31 $4,374,000 $506,000 $3,868,000 11.18%
2019-03-31 $4,036,000 $557,000 $3,479,000 -7.6%
2018-03-31 $4,345,000 $580,000 $3,765,000 n/a

McKesson's Is a Profitable Business

If you are looking to make MCK a long term investment, it's essential that you understand the viability of its business through a study of its margins. Gross margins tell you how much the company makes in profit when only the costs directly related to producing the goods or delivering the service are taken into account. Operating margins, on the other hand, factor in overhead costs so they tell you how effectively McKesson is run.

McKesson's Gross Margins

Date Reported Revenue (k) Cost of Revenue (k) Gross Margin YoY Growth
2022-03-31 $263,638,000 $263,887,000 4.98% -2.35%
2021-03-31 $238,047,000 $244,086,000 5.1% -2.11%
2020-03-31 $230,835,000 $229,386,000 5.21% -4.93%
2019-03-31 $214,319,000 $202,565,000 5.48% 2.05%
2018-03-31 $208,357,000 $197,173,000 5.37% n/a

McKesson's Operating Margins

Date Reported Revenue (k) Operating Expenses (k) Operating Margin YoY Growth
2022-03-31 $263,638,000 $11,092,000 0.77% 136.32%
2021-03-31 $238,047,000 $17,188,000 -2.12% -296.3%
2020-03-31 $230,835,000 $9,534,000 1.08% 163.41%
2019-03-31 $214,319,000 $10,868,000 0.41% 10.81%
2018-03-31 $208,357,000 $10,422,000 0.37% n/a

McKesson's cost of revenue is growing at a rate of 6% in contrast to 7.36% for operating expenses. Sales revenues, on the other hand, have experienced a 4.89% growth rate. As a result, the average gross margins growth is -1.47 and the average operating margins growth rate is 2.85, with coefficients of variability of 4% and 1275% respectively.

McKesson Benefits From Positive Market Signals

The market sentiment regarding McKesson is overwhelmingly positive. The stock has an average rating of buy and target prices ranging from $450.0 to $376.0. MCK is trading -19.36% away from its target price of $429.75. 1.69% of the company's shares are tied to short positions, and 89.29% of the shares are held by institutional investors.

Date Reported Holder Percentage Shares Value
2022-12-31 Vanguard Group, Inc. (The) 9% 12,869,151 $4,459,932,939
2022-12-31 Blackrock Inc. 9% 11,673,238 $4,045,477,332
2022-12-31 State Street Corporation 5% 6,662,968 $2,309,118,173
2022-12-31 JP Morgan Chase & Company 4% 5,315,059 $1,841,986,834
2022-12-31 Massachusetts Financial Services Co. 3% 4,571,999 $1,584,471,962
2022-12-31 Berkshire Hathaway, Inc 2% 2,855,514 $989,606,924
2022-12-31 FMR, LLC 2% 2,735,234 $947,922,688
2022-12-31 Geode Capital Management, LLC 2% 2,503,260 $867,529,779
2022-12-31 Invesco Ltd. 2% 2,352,334 $815,224,865
2022-12-31 Viking Global Investors, L.P. 2% 2,204,418 $763,963,096
The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.