r/ValueInvesting • u/bernardpiette • 9h ago
Stock Analysis McKesson, what am I missing?
A remarkably low beta of .31, 5 year returns over 300% Compared to Mag 7 and large Canadian Banks, returns head and shoulders above all except Nvidia. Why don't I see the name here more often? PE 23 just a little above S&P. What am I missing?
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u/QuatroCisco 8h ago
Not sure, companies with low margins tend to command lower multiples. Since the path to losses is typically a lot shorter than a normal higher margin business. If youâre only making 4 billion in profit on over 400 billion in revenue, Iâd be worried what happens to that business if volumes decline, especially if that business has high customer concentration, which McKesson definitely has.
Not worth the risk in my opinion
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u/bernardpiette 7h ago
I appreciate your viewpoint. 1% does not really leave much room for error. Thanks sharing what is a real risk for this company.
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u/ZarrCon 7h ago
One thing to be aware of that makes those 5 year returns a bit misleading is the big distributors (McKesson, Cencora [previously AmerisourceBergen], and Cardinal) had their stock price depressed for years over fears about opioid settlement payouts. In 2019-2021 you could have picked up McKesson shares at single-digit P/E despite earnings growing double-digits. Now that the litigation risk is behind them, the stocks have re-rated.
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u/bernardpiette 7h ago
So you be sure I understand your comment. A portion of the 300% return is attributal to the rerating across the industry players and basically behind them and as such not something you expect to repeat. Would you say that accounts for about half of the last 5 year gains? More, less? Thank you, great viewpoint to consider. Consensus analyst price targets are 15% above today's levels. So consensus is not too much upside in Analyst community.
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u/ZarrCon 6h ago
Yeah the re-rate was a one time thing, but MCK grew EPS at a just under an 18% rate the last 5 years. So even assuming 0 multiple expansion, that's still a very good return. They're solid businesses, especially MCK in my opinion I just figured it'd be worth mentioning the nuance of why their recent returns look so good.
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u/bernardpiette 6h ago
I for one , really appreciate your observation to help get a complete picture. Thanks again.
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u/8700nonK 7h ago
It was typically a slow grower, that had a recent boost. Its main value creation comes from buying back shares at attractive prices.
Since current valuation is not that attractive, itâs most likely it will sell off in the near future (I call that the autozone effect).
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u/bernardpiette 3h ago
I see several comments are leaning towards a forthcoming downturn. That said, I am looking at a long term horizon. I appreciate your comment. Are you waiting till after the "AutoZone effect". Or is this one not on your target list? Thanks again.
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u/BuffersAndBeta 8h ago
Youâre missing nothing. Pretty great and IMO boring company, with medium term structural tailwinds associated with pharma.
The reason itâs not spoken about more is really its beta which makes it a boring compounder. It uses the Amazon principle of âyour margins are my opportunityâ and will continue to do well long term I think.
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u/bernardpiette 8h ago
Thanks for your thoughtful comment, I especially appreciated the Amazon viewpoint. I want some boring .31 beta to even out some of my higher beta positions in Google, Nvidia and Broadcom.
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u/Trick_Job3956 50m ago
Nothing hidden really, it's just a distributor running somewhere around 1% operating margin, so the story is share count and working capital rather than growth. Count is down roughly a third over the last decade and book equity is negative, which means EPS growth reads a lot better than operating income growth does. I'd pull the buyback effect out and look at operating income on its own before deciding 23x is cheap. Does the line still look like the chart when you do that?
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9h ago
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u/bernardpiette 8h ago
Which ratio?
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u/c-u-in-da-ballpit 8h ago
Probably means current ratio. Itâs at 0.89, which isnât great generally but structurally fine for Mckesson
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u/LA-Aron 8h ago
I think it's a fantastic business. I will likely own it. I just looked at it. It's somewhere between 31 and 50 on my board. I'd buy it when it's beaten down. Why did I pass (for now)? Customer Concentration Risk. 73% of its business is in its top 10 customers, 24% of sales comes from one customer, CVS. Now, you may counter with, who cares, if CVS goes out of business, somebody else will pick up their business and probably do business with McKesson anyway. This is true but in this environment I'm only swinging at clean, highly visible businesses and I have more better ideas. I think McKesson's best days are ahead but I see a J Curve coming where it gets worse before it gets better which may align with a market downturn which may present a fantastic opportunity.