Preface: I am a college student at a semi-target school practicing my fundamental analysis skills; I plan on doing one of these once a week or so. Any feedback/criticism is appreciated and and encouraged. Anyways, here’s some free DD-
Overview:
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MCK ($MCK) is a Pharmaceuticals company that distributes drugs (both brand name and generic) as well as provides practice management, technology, clinical support and business solutions to community-based oncology and other specialty practices.
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MCK has recently been focusing on expanding and building their empire through recent purchases of J Sainsbury plc (2016, UK company allowing increased retail in UK/Ireland) along with CoverMyMeds (2017, US company that provides electronic authorization solutions). Within 2017, MCK has also paid off $1.6 billion of their long term debt as well as repurchasing $2.3 billion in stock (indicating that MCK believes their shares are undervalued, and expects future expansion) (1).
Competitors
- MCK’s two primary competitors in the field are Cardinal Health (CAH) and AmerisourceBergen (ABC). MCK has the largest market cap in the field at 34,976 million; which puts it 30% larger than CAH who is the second at 24,313 million with ABC trailing at 19,951 million (2).
Strengths
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As stated earlier, MCK has been expanding and paying off long term debt over the past couple years. This is a good sign for the future of MCK,indicating the trend of increasing growth over that it’s had over the past few years is likely to continue. MCK also already has 48 US protected patents under its belt, reinforcing the value of the company by protecting their products from competitors (3). In addition, MCK has over doubled its Net Income from 1476 (2015) to 2,258 (2016) to 5,070 (2017); continuing their pattern of over-performing and growing (4).
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As a reference point, their closest competitor CAH had earnings of 1,427 (2016) which was only a slight increase from their 2015 earnings of 1,215 (5).
Weaknesses
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MCK is more susceptible to changes in the healthcare industry and regulatory environment than its competitors CAH and ABC. This is due to the diversity of MCK, as it has a stake in various facets of the industry that more specialized corporations (such as CAH or ABC) aren’t a part of. Any major change in the healthcare industry or regulations could have a negative impact on one of MCK’s business assets while not affecting its competitors.
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MCK also underperformed the S&P 500 in 2017, however it was on-par with the S&P Healthcare index, representing that this has been a less-than-astounding year overall for the healthcare sector in general.
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MCK has also made a 13% cut to their R&D budget (from 392 in 2015/2016 to 341 in 2017) (4). However, this shouldn’t be as much of a concern because of MCK’s recent focus on future expansions with the acquisition of CoverMyMeds along with paying off the long term debt. However, if this trend continues it may be of something to note.
Opportunity
- MCK’s share price have been on the decline after hitting their ATH in 2015 at $241. In 2016 they dropped from $160 to $120 after missing earnings and speculation of drug prices lowering. Since then, MCK has crushed their past 2 earnings reports (reporting in at $3.39 in May; 35 cents above the estimate) and rallied back to a share price of $164 at today's close. If MCK beats earnings again on 7/27 (which is likely seeing how their restructuring has worked out for them so far along with doubling net income) it’s possible that MCK sees continued steady but rapid growth.
Threat
- As stated earlier, any changes to the healthcare industry and regulations will pose a threat to MCK’s assets. Apart from that, MCK doesn’t face too many threats. It’s closest competitor in the industry, CAH, trails MCK at every turn by a decent Margin (in profit, net income, Market Cap, ect.) along with MCK already rallying back and increasing it’s share price, it seems to be a safe pick.
Ratios in comparison to Competitors (2)
P/E: MCK 7.1 CAH 18.4 ABC 17.7
- MCK has the lowest P/E in the industry, and by a large margin; don’t need to explain why this is a good sign.
P/B: MCK 3.2 CAH 3.7 ABC 7.9
- Lowest P/B, albeit by a lesser margin. Still, MCK is reporting in at undervalued on top of the low P/E is a fantastic sign.
Operating Margin: MCK 1.8 CAH 2.0 ABC 1.0
- CAH comes on top here. CAH makes the bulk majority of their revenue from their pharmaceutical distribution department. While MCK makes a lot of their revenues from distribution as well, they are more diversified with their healthcare information and technology sector along with international distribution as well. This will leave them less susceptible if a decrease in retail drug prices were to come about.
Dividend Yield: MCK .7 CAH 1.5 ABC 1.5
- I would be weary about ABC’s high dividend, as it means they aren’t investing as much into future growth. I feel comfortable with CAH and MCK matching dividends, this way it keeps it competitive while MCK doesn’t lose ground on reinvesting their earnings back into the company.
Return On Equity: MCK 51.89 CAH 22.28 ABC 103.36
Conclusion:
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MCK has a lot going for it with it recovering from it’s downtrend. With low P/E and P/B it appears to be undervalued with a high Return on Equity to boot. If MCK outperforms earnings on 7/27 I would recommend opening a position because it will continue its climb back to ATH’s. All this being said, I don’t have any position in the company nor do I intend to open one. I would however if I was in the financial position to do so which makes me envious of everyone out there whose in the position to capitalize on MCK’s dip and rise.
Submitted July 19, 2017 at 04:54PM by Badd_Smoothie http://ift.tt/2tHTXTq
