Is it finally time to cash out of this Buffett-like U.S. pharmaceutical stock?
2019-08-12 from theglobeandmail.com
“McKesson (MCK) Soars to 52-Week High, Time to Cash Out?” cries out a recent posting by a respectable equity research firm.
My students do not believe so, given that they estimate MCK’s intrinsic value to be US$203.76, even accounting for reports last Tuesday of a settlement offer for the role the company played in the U.S. opioid crisis.
McKesson is one of the world’s largest distributors of branded and generic drugs, and medical materials with a market cap of US$27.6-billion, annual revenue of more than US$21-billion and coverage by 19 analysts. Its biggest business is pharmaceutical distribution to independent U.S. drugstores. Outside of United States, it has a retail pharmacy chain in Europe and in Canada.
In case you did not notice it, MCK released its first-quarter earnings on July 31, beating handsomely the consensus estimate by 8.9 per cent. Its bottom line improved by 14.1 per cent year-to-year. Revenue also beat estimates.
Consequently, the stock hit a 52-week high of $149.99. McKesson had gained 34.2 per cent to that point, well above the industry and peers.
After the announcement of the lawsuits, the stock fell to below $140. Its stock was trading close to the 52-week low of $108.34 only a few months ago.
At the time, I wrote an article based on my students’ report in which I argued the stock was a Buffett-like stock with large moat.
I had concluded by saying, “Normally, it is quite difficult to find cheap Buffett-like stocks, but McKesson is very close to be truly undervalued..
My students still hold this belief.
MCK’s share price increase has been driven by a combination of contract renewals, operational improvements, deliverance of strategic promises, and stabilization in the health care market, alleviating the market’s previous concerns regarding Amazon disruption. Amazon has also recently announced that it will no longer go after low margin business and this probably includes the industry in which MCK operates with a typical operating margin of 1.3-1.6 per cent.
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