Intrinsic Value of McKesson Corp MCK

Hey guys, I'm curious to hear your thoughts about the intrinsic value of MCK. Here's an article that David Flood and I put together.

https://www.forbes.com/sites/prestonpysh/2017/10/18/mckesson-mck-stock-value/#11495f173ed4

Comments

  • edited November 2017
    Hi Preston,

    I agree the company looks better valued than it competitors with P/E, P/B, P/S, P/CF, EV/EBIT and ROC all better than industrial average.

    You asked for potential risks, what would concern me is:
    - A lower net income / EPS in Q3-2017 compared to Q3-2016 (only partly explained by higher unusual expenses, not sure what those expenses are);
    - A very low (and deteriorating) current ratio of 1.05 (1.11 in 2016);
    - A deteriorating gross margin compared to 2016;
    - A deteriorating productivity measured by asset turnover compared to 2016;
    - A higher LT debt / assets ratio compared to 2016;

    Perhaps above explains the negative momentum in stock price (dropped from ~165 in summer 2017 to current 135-140 level)?
  • edited November 2017
    I don't understand why is priced so low...the thin margins that in general are a bad thing in this case (economies of scale vs new entrants) is like a barrier to entry IMO...

    I will have to dig in I guess...
  • I understand why Preston and Stig would buy this company. But what was not discussed in the podcast is when/why they would sell it.

    How does one decide it's time to part with a stock?
  • edited November 2017
    That is probably one of the most difficult questions Michael. Tons of books on what to buy and when to buy it, little consolidated advise about the best moment to sell.

    I personally buy companies in their strength (good 6-12 month momentum, close to 52w high), in combination with good value, EPS growth and good financial health indicators such a low debt/EV, low debt/free cash flow and a current ratio > 2. Please note very little US stocks meet these criteria, I was only able to find such companies in Europe and Asia (especially Japan).

    My selling strategy:
    - Companies that lose ± 15-20% shortly after I bought them, are sold. This way I minimize my losses.
    - I keep my winners, also if P/E starts to rise. But even a company that made a 3-digit rally and would drop 20% at any given point (in some cases I might be more forgiving with 25-30%) I sell.
    - Companies that do not outperform the market in the first year after I buy them are likely to be replaced as well, unless there was a specific reason I bought them (exposure to certain sector)

    Curious to hear how others deal with their selling strategy!
  • Hi there,

    Do you think Amazon is a potential risk to MCK and health care sector in general?
    Recently got approval for wholesale pharmacy licenses in multiple states.
  • corralesig ...thanks for the info.
  • @corralesig, I do agree with you: in my view Amazon could indeed be a potential risk to MCK.
    I would evaluate as well the risk of potential opioid class action lawsuits and/or increased regulation.
  • In addition to the Amazon risk which i also consider as a major one, can someone explain what was the deal MCK had with ''Change'' to form the Change healthcare venture? Did they formed this venture (and by doing so taking 6.1B debt) and then the IPO it? why? why not just sell the Core MTS Business or spin it off?
    currently, what is MTC and Change healthcare relations?
  • edited November 2017
    After listening to the podcast episode where you analysed MCK I did my own analysis and came up with almost similar conclusions. Using 5 different valuation methods I got these numbers:

    Intrinsic value: 372
    MOS: 62%
    Annual return: 10%
    Company quality: Excellent
    Total quality score: 85%

    Here are the quantitative warning signs:

    Net income exceeds operating cash flow by 144% TTM
    M-score not within acceptable range -2.12
    Very thin margins 1% avg net margin
    FCF of sales is very low around 2 %
    Earnings stability is not perfect. Some years of lower growth. 6 out of 10 years has been with a growing EPS.

    https://imgur.com/a/YxKDA

    https://www.dropbox.com/s/7w5gy6ah9v72k67/The Warren Buffett Spreadsheet.xlsx?dl=1
  • Hey guys, just had a quick observation on McKesson. Do you think enough emphasis is being placed on the way the company is growing? Excluding the gain on Healthcare Technology net asset exchange in the 2017 financials, it appears that MCK is offsetting shrinking margins with decreases in operating expenses (each analyzed as a percentage of total revenue). Although the effects are currently immaterial, the long-term sustainability of such a strategy appears questionable. Do you view this as temporary given the current regulatory environment surrounding drug prices?
  • @michaels34 I personally part with it, or at least reassess it when the investment goal has been met or circumstances dictate it wont be met
  • Did anyone pay attention to President & CEO John H Hammergren who is frequently reduce his stocks and options?
    One big major selling was at 2010: he owned 4.5 million shares as of June1, 2010, including options and restricted stock holdings. He sold more than 2.9 million of these shares in 2010 (64 percent of his
    holdings), realizing more than $98 million in profits...
  • Interesting update re AMZN being granted licenses. It turns out the licences can only be used for the sale of medical device and supplies distribution, not pharmaceuticals;

    http://www.morningstar.com/news/market-watch/TDJNMW_20171114479/mw-update-amazon-homing-in-on-medical-devicessupplies-not-pharma-jefferies.html

    Looking at MCK's latest 10-K,

    Medical-Surgical distribution & services revenue for FY2016 was $6,244 Million whilst North America pharmaceutical distribution & services was $164,832 Million and International pharmaceutical distribution & services was $24,847.

    Total revenues for FY2016 were $198,533 Million so the medical-surgical distribution & services only accounts for around 3.14% of total revenues.

    http://investor.mckesson.com/sites/mckesson.investorhq.businesswire.com/files/report/file/MCK_10K_3_31_2017_FINAL.pdf


    This suggests that AMZN may not be much of a threat to MCK at present.


    Regards,

    David
  • Thank you David for the update, I'm long MCK
  • Seth Klarman opened a position in MCK in Q3, Markel and Hancock Classic Value also increased their positions;

    http://www.dataroma.com/m/stock.php?sym=MCK


    I'm long MCK

  • ...I have to go to take olives from my trees so I can not check it now... however I will check Allergan Plc later ( ...always from Seth....but way bigger position and price lower from when he got it....I do know nothing about it...the negative numbers in the income statement maybe are due to an acquisition process....I will check later...)... (sorry for being a little bit out of thread..)...

    I never understood Klarman once...sooner or later hopefully... :)
  • @Investor77

    Indeed, half the time I look at the companies he is buying I think 'why are you buying that piece of junk?', he's obviously found hidden value but it can hard to spot at first. It's a good exercise to study them to figure out what he has identified.

    Re Allergan PLC, I will dig into the company when I get time. In fact I'll start a thread now and if anyone finds anything out they can add it there.

    Regards,

    David
  • edited November 2017
    just want to say that klarmans's 0.96 percent position in mck is not a high conviction bet. however following the best investors buy and sells can be a great idea
  • Sorry... I'm late to the party...
    My IV Calc gives MCK:
    Business Predictability Score: 74.92 / 100
    IV : $64.5
    Today's Closing Price : $152.57
  • @mmckenzie

    Can you show the working of your calculation for the IV please.

    Regards,

    David
  • I hope investors watch this weeks 60 Minutes program about McKesson. Seems like board of directors may be jailed. Other than that a great company.
  • edited February 10
    Hey fellows,

    I'm by no means an accountant, so I'm reaching out for a bit of help here. I've dived into McKesson's 2017 annual report. The company reported EPS of $22.73, but a large chunk of that was due to a $3.947 billion one-time gain following the de-consolidation of McKesson's core Technology Solutions business ($3.018 billion post-tax). I'm now trying to figure out what the EPS would be without this gain. Is it just as simple as illustrated in attached image?

    There are 223 million shares outstanding according to the annual report, so I eventually arrived at an EPS of $9.20 as such: 2,052 / 223 = 9.20.

    Please let me know if I'm totally off target here. Thanks guys!


  • @obruhndk you are right. MCK divested most of its healthcare IT business which led to non recurring income. Hence, the super high EPS.
  • edited February 12
    Thanks for confirming @ExtremeAthlete. I've looked at the stock during the weekend and arrived at the same conclusion as Preston and Stig – this is a buy. Through a DCF-analysis I calculated the intrinsic value to be around $200-250 per share using a 3-5% growth rate and a 12.5-15% discount rate. I think that's relatively conservative, and you still get a 25-40% margin of safety.

    For anyone interested in my calculations and additional thoughts, feel free to drop by http://dhandho.dk/en/stock-analysis/mckesson-corp-mck/.

    Thank you all for the reflections in this discussion – great forum! :smiley:
  • Quantitatively this look like a buy. I get a value of $241 (at 10% discount rate, 4% initial growth in FCF, 3% terminal growth).

    I think it passes 3 out of the 4 rules of Warren Buffet and fails on 2nd rule on 'long term prospects'. Curious to know Preston, David: What kind of a moat does this company have ? What happens if AZMN OR APPL gets pharma licenses for e.g.?

    Full disclosure - I am actually long on MCK :smile: ...but I am trying to learn the downsides/risks as well.
  • @obruhndk I think you misunderstood me and only wanted to hear what you wanted to hear. This is a non-recurring income. You should use the lower EPS because it's not going to happen again.
  • @ExtremeAthlete, where did that come from? If you read my analysis you’ll clearly see that I have accounted for the one-time event, and in fact did use a lower operating income figure as my starting point for the DCF, and I presented an adjusted P/E-multiple based on the adjusted earnings.
  • @obruhndk you're right. Please accept my apologies. Sorry about that. o:)
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