McKesson: Still Cheap Despite Recent Gains

Summary

• The company posted a $2.77 earnings beat in Q1 on the back of a strong showing in June.
• Momentum is expected to continue in Q2 and Q3.
• Bullish crossover of the long-term moving averages. More upside needs to confirm the buying signal.

In June of this year, McKesson's (NYSE:MCK) 10-month moving average crossed above its 50-month moving average. As we can see from the chart, this buying signal has been pretty trustworthy in past times. An additional bullish sign would be a visible upturn of the 50-month moving average.

We have been long this stock from time to time but are at present without a position. Our stance may change now as a result of the opioid settlement which brings transparency to the situation with respect to settlement payments. Why? Well, considering the inflation which will undoubtedly occur in drug prices going forward along with McKesson's robust cash flows, the drug distributor should easily be able to absorb these payments which will be spanned out over a number of years.

McKesson finished its fiscal first quarter at the end of June this year and results were announced on the 3rd of August last. Although the top- and bottom-line were down in Q1 this year compared to the quarter of twelve months prior, one just has to look at Q2 (EPS of $3.81) projections to see momentum is definitely with McKesson at present. If the distributor can hit this number, it would be a $0.21 beat over Q2 last year. The $3.81 projection incidentally has increased by around $0.60 per share over the last 30 days alone (Clear momentum).

CEO, Brain Tyler stated on the latest earnings call that because of this growing momentum which began in the latter part of June, guidance would be raised for the year to the $14.70 to $15.50 range. McKesson's delivery prowess along with the clear demand for its products was clearly seen in the first quarter especially in the pharmaceutical & specialty solutions in the US.

Trading at close to the $154 mark, McKesson's valuation especially

Analyst’s Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.