McKesson: A Stock With Upside

| About: McKesson Corporation (MCK)
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McKesson Corporation (NYSE:MCK) is a drug company that saw a lot of growth in the last several years. The company's stock price appreciation did not exactly keep up with the company's organic growth; therefore McKesson Corporation is currently undervalued. In the last decade, McKesson's stock price moved up from $36.02 to $81.34. This indicates a growth of 126% in the last 10 years.

Book Value and Cash Assets

A decade ago, McKesson's book value was $12.78 billion. Of this value, $6.26 billion was due to inventories and $3.60 billion was due to receivables. Today, the company's book value is $33.16 billion. Of this value, inventories make up $10.38 billion and receivables make up $9.67 billion. The company's cash holdings grew greatly from $285 million to $4.19 billion in the last decade. In other words, the company's book value grew by 160% and its cash holdings grew by 1370% in the last decade. McKesson looks undervalued in both metrics.

Tangible Book Value

The company currently enjoys a tangible book value of $12.44 up from $5.14 billion 10 years ago. This is an increase of 142%. In this metric, the company looks fairly valued to undervalued.


By the end of 2001, McKesson's revenues were $13.20 billion. By the end of 2011, the company's revenue was $30.84 billion. In other words, the company saw a revenue increase of 134% in the last decade. The company is fairly valued to undervalued in this metric.

Net Income

In the last decade, McKesson enjoyed a net income growth of 175%. A decade ago, the company's quarterly net earnings were $108 million whereas it is $300 million today. The company actually earned $323 million in the last quarter but $23 million of this income was due to currency exchange rates. In this metric, the company is undervalued.

Additional Considerations

In 2010, the company acquired US Oncology Holdings as a part of its growth plan for $2.1 billion. For this acquisition, the company used money from its own cash reserves as opposed to taking on debt. Now US Oncology belongs to McKesson Distribution Solutions, and contributed to this segment's operating profit of $510 million in the last quarter. The company's other segment, McKesson Technology Solutions enjoyed an operating profit of $69 million in the last quarter.

In January 2012, the company agreed with Katz Group Canada Inc. to acquire its Drug Trading Company Limited for CAD $920 million. This acquisition will also be funded with McKesson's existing cash. Drug Trading Company Limited will be also incorporated with McKesson's Distribution Solutions segment and help the company's market share gains in Canada.


McKesson is a successful company that will continue to reward investors. Currently the company is underpriced and it will continue to see growth in the future. Majority of the analysts covering the stock rate it as strong buy or buy with an average price target of $96. I believe McKesson is currently a buy due to its 10 year trend.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.