Alert: Stunning Pharma Stock 32.7% Undervalued
Investment Alert: Buy McKesson (MCK) Under $370/share
Disclaimer: Investment Alerts have a medium to long-term time horizon. These do not constitute financial advice and you should contact a financial advisor before deciding whether it is appropriate for your individual circumstances.
There’s lots to like about McKesson. If you’re not already familiar with the company it is primarily a pharma distribution and medical supplies company.
Early last year, the Board of Directors clearly believed the company was undervalued when they authorized a $2.8 billion share repurchase, followed by an additional $4 billion repurchase in July.
The effect of such repurchase plans is fourfold:
- Reduce the number of shares outstanding
- Increase earnings per share
- Signal to shareholders the company is undervalued
- Increase value of shares for existing shareholders
The strategy has proven effective with the share price up almost $100 since early last year. But if our calculations are right, the fundamentals point to lots more upside to come.
Key Points
- McKesson has a strong track record of revenue growth with a nine year unbroken streak.
- The current market capitalization suggests it is significantly undervalued to the tune of almost 33%.
- The company has a seasonal tailwind that has spurred share price gains of over 10% growth in 78% of the prior 28 years.
Investment Thesis
We like companies that have carved out a business model so strong that it allows them to grow in good times and bad. That’s the case with McKesson, which has a 9 year unbroken streak of rising revenues:
- 2014: 12.4%
- 2015: 30.3%
- 2016: 6.6%
- 2017: 4.0%
- 2018: 4.9%
- 2019: 2.9%
- 2020: 7.8%
- 2021: 3.1%
- 2022: 10.8%
Ideally, the sustained revenue growth would have translated to growing profits but that’s not the case with net income declining by about 15% in the past fiscal year. Still, the golden rule is to grow revenues, and with that checkbox ticked, management has more flexibility to manage costs appropriately to drive profitability.
Now let’s turn our attention to income. You wouldn’t buy McKesson for its dividend, but a modest one is on offer. The company pays out 0.6% annually and has strong earnings that should provide management with the option to hike the yield annually.
The balance sheet looks good too. Liquidity is not an issue, the current ratio is 1.8 and quick ratio is 1.3. It has been growing assets and has a low-ish debt-to-equity ratio of just 0.4, signifying that excessive leverage is not a concern.
Two compelling reasons stand out to buy McKesson now. The first is the company’s current market capitalization suggests it’s significantly undervalued. We see fair value sitting at $484 per share, which would imply it is almost 33% undervalued now. A second reason is the seasonal tailwind that usually kicks in at this time of year. Over the coming 12 weeks, McKesson has averaged a share price gain of a little over 10% in 22 of the past 28 years.
Combine all those factors and McKesson is well worth placing on your watchlist.
