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Company Description
McKesson Corporation, ranked 11th on the Fortune 500 companies, provides pharmaceuticals, medical supplies, and healthcare information technology that make healthcare safer while reducing costs. The Company operates in two segments, McKesson Distribution Solutions, and McKesson Technology Solutions. Its Revenue is $179 billion in FY2015 that is the 11th highest revenue generating company in the United States.
Investment Thesis:
I recommend a "BUY” with a target price of $248.87. The company is a leader in the healthcare sector, which has the better market scale and efficient service to deliver better pricing and convenience to its customers. It also has robust and stable cash flows with approximately 8-10%FCF yields. The company's revenue growth, impressive ROE, good cash flow generated from operations, notable EPS growth and growth in net income. It is a big player in one of the most defensive industries in the market. The Technology Solutions division will contribute more to its revenues in coming years. Besides, The Department of Health and Human Services has authorized a budget for the fiscal year 2015 of $1.020 trillion and past five years budget is in an increasing trend. The government policy is a big positive factor for the healthcare sector especially the Patient Protection and Affordable Care Act (PPACA) Also, McKesson opens the market outside the U.S in recent years, and there is an obvious revenue boost from the international market.
Risks:
• Reform and regulation in health care industry • Increasing Competition • Proprietary protections • Customer defection • Foreign currency fluctuations
Opportunities • Aging Baby Boomers • International market • Government policy: Affordable Care Act • Strategic M&A
SIM Equity Research Report
Analyst: Simon Wu November 8, 2015
614-‐4461480
McKesson Corp (NYSE: MCK)
Sector： Healthcare
Recommendation: Buy Current Price: $183.75
Target Price: $248.87
Upside Potential: 32.5%
Key Statistics
Market Cap: 42.28 B
Shares Outstanding: 230.11 M
Dividend Yield: 0.57%
52 week range: $160.10 -‐ $243.61
Beta: 0.84
P/E: 24.04
P/S: 0.23
P/B: 4.87
EV/EBITDA: 10.99
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Table of contents Company Overview……………………………………………………………………………………………………3
Business segments…………………………………………………………………………………………………..………3
Market outlook………………………………………………………………………………………………………………..4
Competitive analysis………………………………………………………………………………………………………..5
Recent news…………………………………………………………………………………………………………………….6
Investment thesis………………………………………………………………………………………………………7
Economic analysis……………………………………………………………………………………………………………7
Financial analysis……………………………………………………………………………………………………………. 8
2nd fiscal quarter analysis…………………………………………………………………………….……………….9
Valuation………………………………………………………………………………………………………………………….10
Multiple Valuation………………………………………………………………………………………………………….10
Peer…………………………………………………………………………………………………………………………….10
Company…………………………………………………………………………………………………………………..…11
Sector………………………………………………………………………………………………………………………… 11
DCF………………………………………………………………………………………………………………………………. 11
Target Price…………………………………………………………………………………………………………………...12
Risks …………………………………………………………………………………………………………………………………12
Conclusion……………………………………………………………………………………………………………….. 14
Appendix 1……………………………..………………………………………………………………………………………….15
Appendix 2………………………………………………………………………………………………………………………….16
Citation……………………………………………………………………………………………………………………………….17
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Company Overview McKesson Corporation is an American industry- leading company distributing pharmaceuticals at a retail sale level and providing medical supplies, healthcare information technologies and care management tool to the healthcare industry in the United States and internationally. McKesson currently headquartered in San Francisco, CA and has 76,000+ employees. McKesson founded in 1833 and went public in 1994 with sticker "MCK" traded in NYSE and now become NASDAQ-100 index and S&P500 index component.
Business segments
The company operates in two main segments, McKesson Distribution Solutions, and McKesson Technology Solutions in US and Internationally.
Distribution Solutions Segment:
Distribution solution segment is a major part of McKesson that consists of the businesses including North America pharmaceutical distribution and services, International pharmaceutical distribution and services and Medical-Surgical distribution and services.
The distribution solution generates 98.3% of total revenue in Figure A above that is the overwhelming major revenue of McKesson. This business segment supplies pharmaceuticals and other medical products to following primary customer channels:
• National retail pharmacies • Independent retail pharmacies • Institutional healthcare providers such as hospitals, clinics, and alternate site
organizations
Also, Medical-Surgical distribution and services is another significant segment of McKesson because it generates about more than double of the margins that traditional distribution services. The Medical-Surgical Solutions segment supplies equipment, logistics, and other services to healthcare providers includes physicians' offices, surgery centers, clinics, and long-term care facilities.
Technology Solutions Segment:
0
50
100
150
2011 2012 2013 2014 2015
Billion
Figure A:Revenue segment by Geography
US Internadonal
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Technology Solutions segment provides a wide range of software and IT services for healthcare organizations including hospitals, physician offices, homecare providers, and pharmacies to improve quality and patient safety, reduce the cost and manage resources and revenue stream.
Market outlook
Leading positions in health care distribution and technology [1] • No. 1 in pharmaceutical distribution in U.S. and Canada • No. 1 in medical-surgical distribution to alternate care sites • No. 1 in generics pharmaceutical distribution • No. 1 in hospital automation • No. 1 in medical-management software and services to payers • No. 2 in specialty pharmaceutical distribution and services • 52% of U.S. hospitals use our technology and services • 20% of physicians use our technology and services • 1/3 of all pharmaceuticals used each day in North America delivered by McKesson • 4th largest pharmacy network: 2,900 Health Mart® retail pharmacy franchisees Market share: (source: Bloomberg)
Cardinal Health 24%
AmerisourceBergen 31%
McKesson 45%
FIGURE1: MARKET SHARE OF PHARMACEUTICAL DISTIBUTION
CardinalHealth 30%
Henry Schein 26%
McKesson 15%
PaUern Cos 4%
Owens&Minor 25%
FIGURE2:MARKET SHARE OF MEDICAL DISTIBUTION
UnitedHealth-‐ OptumInsight
55% McKesson
32%
Tenet Healthcare -‐Conifer 13%
FIGURE3: MARKET SHARE OF IT BUSINESS
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Competitive analysis
McKesson's competitive advantage largely relies on the fact that it, along with Cardinal Health and AmerisourceBergen, oligopolies the wholesale pharmaceutical distribution market, which creates a high barrier for new competitors to enter the market.
Also, McKesson may gain positive impacts from recent health-care reform. For example, as the number of newly insured patients rises, McKesson will have more potential customers for its generic drugs, which tend to produce higher profit margins than brand-name drugs produced by Pfizer and Merck [2].
Information technology not only affects how individual activities are performed but, through new information flows, it is also greatly enhancing a company's ability to exploit linkages between activities, both within and outside the company. The technology is creating new linkages between activities, and companies can now coordinate their actions more closely with those of their buyers and suppliers. For example, McKesson, the nation's largest drug distributor, provides its drugstore customers with terminals. The company makes it so easy for clients to order, receive, and prepare invoices that the customers, in return, are willing to place larger orders. At the same time, McKesson has streamlined its order processing [3]. Also, information technology segment has a highly expected growth rate.
• Competitors:
The two major competitors are AmerisourceBergen and Cardinal Health. AmerisourceBergen is focused on pharmaceutical distribution as its major business. However, AmerisourceBergen is not involved in the healthcare IT business, which might give McKesson an advantage as the healthcare IT market grows and possibly becomes more consolidated. AmerisourceBergen is more considered as a "pure" distribution player in the market, which has a minimal diversification in the industry.
While McKesson and Cardinal Health compete with each other in medical and surgical manufacturing, and other segments mainly competitors in Healthcare Information Technologies include: Owens & Minor (OMI) and Henry Schein (HSIC) in the manufacturing segment and Cerner (CERN), Eclipsys (ECLP), Allscripts Healthcare Solutions (MDRX), and Computer Programs and Systems (CPSI) [4].
Strategic M&A McKesson’s strategically thinking help itself better stand among the industry. McKesson has many successful acquisitions in the U.S and globally which gain more market than main competitor domestically and internationally.
• McKesson integrates European pharmaceutical wholesaler and retail Celesio with $29 billion annual sales
• McKesson Announces Agreement to Purchase the Pharmaceutical Distribution Division of UDG Healthcare PLC September 18, 2015 McKesson acquires the pharmaceutical distribution division of UDG Healthcare plc for €408 million in cash. The acquisition will add a leader in pharmaceutical
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distribution across the Republic of Ireland and Northern Ireland to McKesson's European business. [5]
Stocks repurchase
MCK buy back $340 million of its common stock last fiscal year, and announce another $500 million common stock. The company repurchase a large amount of shares might mean the price is undervalued.
Recent news
1. Nearly 500 Organizations License InterQual in Six-Month Period November 04, 2015
370 providers and 98 managed care organizations chose InterQual for evidence-based clinical criteria and medical review automation in first six months of 2015.
Also, the strong demand for InterQual® Criteria reflects the market’s growing need for technology that supports value-based care initiatives. [6]
2. McKesson Launches Chronic Care Management Services November 04, 2015
McKesson Business Performance Services (McKesson) has contracted with Sanctus Healthcare, a California practice management firm supporting independent private practice physicians with the delivery of chronic care management services. The initiative is designed to strengthen the continuity of care for chronically ill patients while providing a low-risk bridge for physicians seeking to transition from fee-for-service to value-based reimbursement. [7]
3. McKesson to Expand Distribution Agreement with Albertsons September 15, 2015 Expanded relationship to ensure highest levels of service for Albertsons' pharmacy customers • McKesson to assume responsibility for the sourcing and distribution of generic and
brand pharmaceuticals for nearly 1,700 pharmacies across the Albertsons' 33-state operating area
• Albertsons to benefit from the scale and strength of McKesson's proprietary OneStop® generics program and efficiency of McKesson's daily direct-to-store service model for pharmaceutical products
• Distribution agreement extends through April 2021 [8]
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Investment thesis
Economic analysis
• Demographic trends
One of the most influential macroeconomic indicators for Healthcare sector is the aging population. This group of the population provides the largest demand for pharmaceutics and medical products. Through Figure 4, the trend of 65+ is increasing and will continuously grow by national projection. The population of age 65 and older is more than any other time throughout the U.S. history.
Also, according to 2014 National Projection of U.S Census Bureau, the population of 65 and older (currently 46 million) will increase to 88 million by2060, which means the demand for healthcare product will keep the increase in next several decades.
• Public Policy: As a player in the healthcare industry, McKesson is highly influenced by government’s healthcare policy. The enactment of Medicaid and Medicare influence the drug’s price, and quantity demanded of medical and healthcare related products and services which have a significant effect on McKesson's pharmaceutical distribution business because it covers approximately 20% of the US population. Uninsured rate decreases from 13.3% in 2013 10.4% of people were without health insurance during 2014 by The U.S. Census Bureau.
• Spending Trends: Health spending is expected to grow but at a relatively low rate. Factors contributing to the growth include expanded health care coverage, increased insurance costs, and prescription drug spending.
1. Health spending as % of GDP increase: Healthcare spending in June 2015 was 18.1% of the GDP, up from 17.7% in July 2014. 2. Spending on hospital care: Spending on hospital care increased from 5.5% in July 2014 to 6.2% in July 2015, representing $1.05 trillion in total health expenditure. 3. Prescription drug spending: Prescription drug spending grew from 9.3% in May 2015 to 9.7%, or $337 billion, of total health spending in July 2015. [9] 4. The 2016 budget of Department of Health and Human Services increased.
12.00%
13.00%
14.00%
15.00%
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38
40
42
44
46
2010 2011 2012 2013 2014
百万
Figure 4: US 65+ Populadon Trends
US Populadon Age 65+
Percentage of 65+ populadon
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Financial analysis
Income Statement Analysis
Figure 5 of Consensus Revenue and Earnings Estimates
According to Appendix 1 and Figure 5 above, MCK has a tremendous revenue increase from $137.4 billion to $179 billion in FY 2015, mostly due to the sales of the international market. The projected sales growth rate for the next three years are 5%, 8%, and 7% respectively, which is similar to the consensus estimates. The projected estimated Earnings per Share are $7, $8, and $9 for the next three years, which are slightly lower than the consensus. The Revenue Growth trend is below the levels of the pharmaceutical industry but above the sector. The growth of the McKesson’s International segment is key for the company. The revenue of international segment contributed more and boosted in last fiscal year. So in the next three years, the project revenue growth rate of the international pharmaceutical distribution segments could slightly higher growth rate than consensus estimates due to improved global economy and business expansion in Europe and Asian soon. Tax rate is relative high among industry but it is on a downside because foreign countries that contribute lower income tax rates than US market.
Profitability Analysis Figure 6 (source: http://csimarket.com) Fiscal Year 2011 2012 2013 2014 2015 ROA 3.89% 4.24% 3.85% 2.43% 2.86% ROE 16.65% 20.54% 18.93% 14.76% 19.29% Gross Margin 5.33% 5.35% 5.70% 6.04% 6.37% EBITDA Margin 2.1% 2.22% 2.25% 2.25% 2.26% Operating Margin 1.62% 1.75% 1.89% 1.72% 1.66%
Both Return on Asset and Return on Equity in 2015 fiscal year improved compare to the previous year, due to annual net income growth. ROA is relatively lower than industry. However, ROE remains on high level among industry, healthcare sector and whole market. Gross Profit and EBITDA margin beat the history due to McKesson’s Revenue increased to 179,045 $ millions by 30.11 %.
Year FY2015 FY 2016 forward estimate
FY 2017 forward estimate
FY 2018forward estimate
Revenue 179.05 B 181.00 B 195.86 B 212.21 B % Growth YOY 30% 4% 8.2% 8.3% Shares Outstanding
232.4 M
EPS 7.4 9.3 12.1 14.28 EPS growth YOY 38% 26% 30% 18%
MCK Industry
Sector S&P500
0%
50%
ROA ROE Gross Margin
Figure 7: 2016 FY 2Q Probability Comparison
MCK Industry Sector S&P500
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Efficiency Analysis According to Figure 8, MCK’S inventory turnover slightly below its industry but higher than sector and market. Asset turnover and Receivable turnover are above the benchmarks.
Liquidity Analysis McKesson Corp's quick ratio improved from 2013 to 2015 and current ratio improved from 2013 to 2014 but then slightly deteriorated from 2014 to 2015. However, both of them stay on the average level and stable.
Fiscal 2016 2nd Quarter Result [10]
McKesson delivered solid results during the first two quarters of 2016 fiscal year. In addition to the strong operating performance across our businesses in the second quarter, the company repurchased approximately 2.5 million shares totaling nearly $500 million, acquired the UK pharmacy operations of Sainsbury’s and the pharmaceutical distribution business of United Drug Group in Ireland.
Highlights • The revenue up 10% to 48.8 million. • Second-quarter Adjusted Earnings per diluted share of $3.31, up 19%. • Consolidated results include a pre-tax gain of $51 million • Board of Directors authorized a new $2 billion share repurchase program • Fiscal 2016 Outlook: Adjusted Earnings per diluted share of $12.50 to $13.00
0.68
0.61
0.58
0.62
0.63
1.19
1.09
1.08
1.1
1.09
2011 2012 2013 2014 2015
FIGURE 9:LIQUIDITY RATIO COMPARISON SOURCE: CSIMARKET.COM
Quick Rado Current Rado
MCK Industry
Sector S&P500
0
5
10
15
20
25
Inventory Turnover
Asset Turnover
A/R Turnover
Figure 8: Efficiency Rado Comparison
MCK Industry Sector S&P500
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Segment results
• Distribution Solutions revenues were $48 billion for the quarter, up 11% on a reported basis and up 14% on a constant currency basis. North America pharmaceutical distribution and services revenues were $40.6 billion for the quarter, up 16% on a reported basis and 17% on a constant currency basis. North America revenue growth primarily reflects market growth and our mix of business. International pharmaceutical distribution and services revenues were $5.9 billion for the quarter, down 13% on a reported basis and up 2% on a constant currency basis. Medical-Surgical distribution and services second-quarter revenues were up 3% for the quarter, driven by market growth.
• Technology Solutions second-quarter revenues were $721 million, down 6% compared to the prior year, primarily driven by the completed sale of our nurse triage business in our first quarter and by the anticipated year-over-year decline in our hospital software business, partially offset by growth in our other technology businesses.
Valuation
Peer comparison
Figure 10: Industry multiples comparison (Yahoo Finance)
Valuation Measures
MCK CAH ABC Industry Average
Market Cap: 42.33B 28.94B 21.00B 28.40B
Qtrly Rev Growth (yoy)
10% 17% 12% 7%
Revenue (ttm)
187.72B 106.52B 135.96B 135.96B
EBITDA (ttm)
4.21B 2.84B 1.61B 2.84B
Net Income (ttm)
2.09B 1.33B -134.89M
EPS (ttm) 7.64 3.99 -0.62 3.99
P/E (ttm) 20.74 20.36 N/A 23.8 P/S (ttm) 0.24 0.26 0.17 5.52
P/B (ttm) 5.05 4.22 13.6 5.77 P/CF (ttm) 13.22 4.22 6.48 18.93
EV/EBITDA (ttm)
12.13 10.43 71.39 27.71
MCK= McKesson
CAH= Cardinal Health, Inc.
ABC= AmerisourceBergen
Industry= Drugs Wholesale
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Multiples Valuation
Figure 11: MCK’s historical multiples comparison (Bloomberg)
Company Valuation: The company traded slightly higher than historical median however, it is reasonable because healthcare has the high-expected growth and the potential to grow. Industry comparison: McKesson’s market cap and revenues are highly above all the main competitors and industry average which means the company is able to gain the major market share. Also, McKesson keeps a good growth rate of revenue and net income, which higher than industry average. According to figure x, McKesson trades below the industry average multiples includes P/E, P/B, P/S, and P/EBITDA, which indicates MCK is likely to be undervalued.
Sector valuation：Based on figure 12 and 13 below，current health care Sector multiples are trading slightly above its historical median but they are still in understandable range, however, it is the whole sector is outperformed and “hot” which means it is fairly valued.
Figure 12: Sector historical multiples (Bloomberg)
Figure 13 Sector relative toS&P500 (Bloomberg)
DCF Model: Appendix 2 illustrates the DCF valuation for McKesson Corp that provide implied value per share of MCK is $269.74 with an upside of 46.8%, which slightly higher than the multiple valuation estimation. The forecasted terminal FCF growth rate is 6% and the terminal discount rate is 9.75% that reflects McKesson’s mature market dominance and optimistic international market expansion. The government policy and demographic condition will give healthcare opportunity for growth. The forecast estimates Capex as 0.3%
Absolute basis High Low Median Current P/E 28.94 7.63 17.09 20.74 P/B 6.98 2.25 3.28 5.05 P/S 0.32 0.09 0.18 0.24 P/EBITDA 13.88 5.1 9.25 10.75
Sector High Low Median Current P/E 23.95 9.94 15.5 21.32 P/B 3.97 1.91 2.97 3.57 P/S 1.92 0.97 1.45 1.70 P/EBITDA 14.21 6.48 9.62 12.72
Relative to S&P500 High Low Median Current P/E 1.33 0.50 0.99 1.76 P/B 1.59 1.06 1.31 1.42 P/S 1.71 0.89 1.10 1.01 P/EBITDA 1.75 0.744 1.76 1.35
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and Operating margin as 1%, which based on company’s historical statistics. But the forecasted Tax Rate is lower due to its significant increasing revenue in International market.
Sensitivity analysis:
Discount Rate
FCF Grow
th
Rate
9.25% 9.5% 9.75% 10% 10.25% 5% 256.01 242.02 229.50 218.22 208.02 5.5% 279.44 262.34 247.25 233.83 221.81 6% 310.08 288.47 269.74 253.33 238.85 6.5% 351.86 323.31 299.14 278.41 260.44 7% 412.21 372.09 339.24 311.85 288.66
Figure 14: Sensitivity Table
Multiple Valuation of McKesson’s Target Price
Figure 15: Target Price
Target Price:
Final Target price is weighting 75% of implied value from DCF model and 25% from average of multiple target prices.
75% * $269.74 +25% * $186.26 = $ 248.87
Risks:
Reform and regulation in health care industry: Many of our products and services are intended to function within the structure of the healthcare financing and reimbursement system currently being used in the United States. In recent years, the healthcare industry in the United States has changed significantly in an effort to reduce costs. These changes have included cuts in Medicare and Medicaid reimbursement levels, increases in the use of managed care, consolidation of pharmaceutical and medical-surgical supply distributors and the development of large, sophisticated purchasing groups. We expect the healthcare industry in the United States to continue to change and for healthcare delivery models to evolve in the future.
Increasing Competition: Distribution Solutions segment faces strong competition, both in price and service, from international, national, regional and local full-line, short-line and specialty wholesalers, service merchandisers, self-warehousing chains, manufacturers
Absolute Valuation
Current Target Multiple
Target/Current Expected EPS Target Price
P/E 20.74 15.15 0.73 12.72 192.7 P/B 5.05 4.03 0.80 155.6 P/S 0.24 0.23 0.95 184.76 P/EBITADA 10.75 11.68 1.09 211.99 Average 186.26 DCF 269.74
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engaged in direct distribution, third-party logistics companies and large payer organizations. In addition, this segment faces competition from various other service providers and from pharmaceutical and other healthcare manufacturers as well as other potential customers of the segment, which may from time-to-time decide to develop, for their own internal needs, supply management capabilities that would otherwise be provided by the segment. Price, quality of service, and convenience to the customer are generally the principal competitive elements in this segment. Technology Solutions segment experiences substantial competition from many firms, including other software services firms, consulting firms, shared service vendors, certain hospitals and hospital groups, payers, care management organizations, hardware vendors and internet-based companies with technology applicable to the healthcare industry. Competition varies in size from small to large companies, in geographical coverage and in scope and breadth of products and services offered. These competitive pressures could have a material adverse impact on our results of operations.
Volatility of global capital markets: Volatility and disruption in the global capital and credit markets, including the bankruptcy or restructuring of certain financial institutions, reduced lending activity by other financial institutions, decreased liquidity and increased costs in the commercial paper market and the reduced market for securitizations, may adversely affect the availability and cost of credit already arranged and the availability, terms and cost of credit in the future, including any arrangements to renew or replace our current credit or financing arrangements. This risk may increase company’s costs of borrowing.
Proprietary protections: We rely on a combination of trade secret, patent, copyright and trademark laws, nondisclosure and other contractual provisions and technical measures to protect our proprietary rights in our products and solutions. There can be no assurance that these protections will be adequate or that our competitors will not independently develop products or solutions that are equivalent or superior to ours. These litigation expenses, damage payments or costs of developing replacement products or technology could have a material adverse impact on our results of operations.
Customer defection: Future advances in the healthcare information systems industry could lead to new technologies, products or services that are competitive with the technology products and services offered by our various businesses. To remain competitive in the evolving healthcare information systems marketplace, our technology businesses must also develop new products on a timely basis. The failure to develop competitive products and to introduce new products on a timely basis could curtail the ability of our technology businesses to attract and retain customers, and thereby could have a material adverse impact on our results of operations.
Foreign currency fluctuations: As increasing revenues are generated outside of the United States, for example，the Company’s acquisition of Celesio significantly increases our exposure to foreign currency fluctuation risks. These risks include uncertainty regarding the Brazilian real, the British pound sterling, the Canadian dollar, the Euro, and the Norwegian krone that could adversely impact our results of operations and capital ratios based on the movements of the applicable foreign currency exchange rates in relation to the U.S. dollar. Fluctuating exchange rates cause the value of items on both the assets and liabilities side of
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the balance sheet to change, which could also negatively impact our results of operations. A depreciation of non-U.S. dollar currencies relative to the U.S. dollar could have a material adverse impact on our results of operations. [11]
Conclusion With the projected target price of $248.87 and 32.5% upside potential, I recommend a “BUY” in McKesson Corp (MCK). The share price currently remains undervalued at $183.75. First, robust financial statement and reasonable valuation indicate that MCK has further potentials. Revenues grows strongly recently both in North America and European market. Government’s policy and macroeconomic indicator such as increasing US aging population both have positive effect to healthcare, which helps McKesson stand a good chance in whole market. The strong earnings report of 2015 fiscal year also gives confidence to buy and hold McKesson until the price moves to expected level.
McKesson (MCK) Current Price: $183.75 Recommendation: Buy Target Price: $248.87
Upside Potential: 32.5%
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Appendix 1 Income Statement
MCKFY FY FY FY FY FY FY FY
Millions 2018E 2017E 2016E 2015 2014 2013 2012 2011Revenues 217,249.62$ 203,037.03$ 187,997.25$ 179,045.00$ 137,392.00$ 122,196.00$ 122,734.00$ 112,084.00$ Consensus 212,214.51$ 195,986.80$ 181,000.00$ 174,000.00$ Cost of Sales (203,530.32)$ (190,130.82)$ (175,867.36)$ (167,634.00)$ (129,040.00)$ (115,315.00)$ (116,167.00)$ (106,114.00)$ Gross margin 13,719.30$ 12,906.21$ 12,129.89$ 11,411.00$ 8,352.00$ 6,881.00$ 6,567.00$ 5,970.00$ Operating expensesSelling, distribution and administrative expenses (10,427.98)$ (9,745.78)$ (9,023.87)$ (7,901.00)$ (5,388.00)$ (4,110.00)$ (3,829.00)$ (3,529.00)$ Research and development (434.50)$ (406.07)$ (375.99)$ (392.00)$ (457.00)$ (433.00)$ (440.00)$ (407.00)$ Claim and litigation charges (1,485.50)$ (1,371.91)$ (1,267.00)$ (150.00)$ (68.00)$ (72.00)$ (149.00)$ (213.00)$ Gain on business combination -‐$ -‐$ -‐$ -‐$ -‐$ 81.00$ -‐$ -‐$ Total Operating Expenses -‐$ (11,523.76)$ (10,666.86)$ (8,443.00)$ (5,913.00)$ (4,534.00)$ (4,418.00)$ (4,149.00)$ Operating Income 13,719.30$ 1,382.45$ 1,463.03$ 2,968.00$ 2,439.00$ 2,347.00$ 2,149.00$ 1,821.00$ Other Income, Net 63.06$ 63.04$ 63.02$ 63.00$ 32.00$ 34.00$ 21.00$ 36.00$ Impairment of an Equity Investment -‐$ -‐$ -‐$ -‐$ -‐$ (191.00)$ -‐$ -‐$ Interest Expense (371.76)$ (372.51)$ (373.25)$ (374.00)$ (300.00)$ (240.00)$ (251.00)$ (222.00)$ Income from Continuing Operations Before Income Taxes 2,782.48$ 2,740.01$ 2,698.18$ 2,657.00$ 2,171.00$ 1,950.00$ 1,919.00$ 1,635.00$ Income Tax Expense (862.57)$ (876.80)$ (809.46)$ (815.00)$ (757.00)$ (587.00)$ (516.00)$ (505.00)$ Income from Continuing Operations 1,919.91$ 1,863.20$ 1,888.73$ 1,842.00$ 1,414.00$ 1,363.00$ 1,403.00$ 1,130.00$ Loss from Discontinued Operations, Net of Tax (299.00)$ (156.00)$ (25.00)$ -‐$ -‐$ Discontinued Operation – gain on sale, net of tax -‐$ -‐$ -‐$ -‐$ 72.00$ Net Income 1,589.75$ 1,574.01$ 1,558.43$ 1,543.00$ 1,258.00$ 1,338.00$ 1,403.00$ 1,202.00$ Net Loss (Income) Attributable to Noncontrolling Interests -‐$ -‐$ -‐$ (67.00)$ 5.00$ -‐$ -‐$ -‐$ Net Income Attributable to McKesson Corporation 1,589.75$ 1,574.01$ 1,558.43$ 1,476.00$ 1,263.00$ 1,338.00$ 1,403.00$ 1,202.00$
Earnings (Loss) Per Common ShareDiluted Continuing Operations 7.54$ 6.08$ 5.69$ 5.59$ 4.29$ Discontinued Operations (1.27)$ (0.67)$ (0.10)$ -‐$ 0.28$ Total 6.51$ 6.45$ 6.38$ 6.27$ 5.41$ 5.59$ 5.59$ 4.57$ Consensus 16.30$ 14.51$ 12.63$ Basic Continuing Operations 7.66$ 6.19$ 5.81$ 5.70$ 4.37$ Discontinued Operations (1.29)$ (0.68)$ 0.10$ -‐$ 0.28$ Total 6.37$ 5.51$ 5.91$ 5.70$ 4.65$ Weighted Average Common Shares Diluted 244 244 244 235 233 239 251 263 Basic 240 240 240 232 229 235 246 258
Tax Rate 31% 32% 30% 31% 35% 30% 27% 31%
D&A 920.00$ 945.00$ 962.00$ 1,017.00$ 735.00$ 581.00$ 551.00$ 496.00$ D&A % of Sales 0.42% 0.47% 0.51% 0.57% 0.53% 0.48% 0.45% 0.44%
CapEx -‐595 -‐580 -‐560 -‐545 -‐419 -‐400 -‐403 -‐388% of Sales -‐0.27% -‐0.29% -‐0.30% -‐0.30% -‐0.30% -‐0.33% -‐0.33% -‐0.35%
Receivables (1,368.67)$ (1,319.74)$ (1,278.38)$ (2,821.00)$ (868.00)$ 318.00$ (770.00)$ (673.00)$ % of Sales -‐0.63% -‐0.65% -‐0.68% -‐1.58% -‐0.63% 0.26% -‐0.63% -‐0.60%Inventory (1,738.00)$ (1,583.69)$ (1,597.98)$ (2,144.00)$ (1,182.00)$ (60.00)$ (878.00)$ 367.00$ % of Sales -‐0.80% -‐0.78% -‐0.85% -‐1.20% -‐0.86% -‐0.05% -‐0.72% 0.33%Payables 3,823.59$ 3,451.63$ 3,383.95$ 4,718.00$ 2,412.00$ (125.00)$ 2,027.00$ 533.00$ % of Sales 1.76% 1.70% 1.80% 2.64% 1.76% -‐0.10% 1.65% 0.48%Change in WC 575.20$ 94.75$ (3,422.69)$ 5,221.00$ 4,845.00$ (4,058.00)$ 2,836.00$
Revenue Growth% YoY 7% 8% 5% 30.32% 12.44% -‐0.44% 9.50%Growth Profit% 6.30% 6.40% 6.30%Operating Expenses as % of SalesSelling, distribution and administrative expenses -‐5% -‐5% -‐5% -‐4.41% -‐3.92% -‐3.36% -‐3.12%Research and development -‐0.20% -‐0.20% -‐0.20% -‐0.22% -‐0.33% -‐0.35% -‐0.36%Claim and litigation charges -‐0.70% -‐0.70% -‐0.70% -‐0.08% -‐0.05% -‐0.06% -‐0.12%Gain on business combination 0% 0% 0% 0.00% 0.00% 0.07% 0.00%Operating Income 1.76% 1.76% 1.76% 1.66% 1.78% 1.92% 1.75%Other Income, Net 0.03% 0.03% 0.03% 0.04% 0.02% 0.03% 0.02%Impairment of an Equity Investment 0% 0% 0% 0.00% 0.00% -‐0.16% 0.00%Interest Expense -‐0.20% -‐0.20% -‐0.20% -‐0.21% -‐0.22% -‐0.20% -‐0.20% Income from Continuing Operations Before Income Taxes 1.55% 1.55% 1.55% 1.48% 1.58% 1.60% 1.56%Net Income % as Sales 1% 1% 1% 0.86% 0.92% 1.09% 1.14%
16
Appendix 2 DCF model
Analyst: Simon Wu 9.75%11/8/2015 6.0%(Millions)Year 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E
Revenue 187,997 203,037 217,250 230,285 244,102 256,307 269,122 279,887 291,082 299,815 308,809 % Grow th 8.0% 7.0% 6.0% 6.0% 5.0% 5.0% 4.0% 4.0% 3.0% 3.0%
Operating Income 1,463 1,382 13,719 2,303 2,441 2,563 2,691 2,799 2,911 2,998 3,088 Operating Margin 0.8% 0.7% 6.3% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%
Interest Income (309) (309) (310) (329) (349) (366) (384) (400) (416) (428) (441) Interest % of Sales -0.2% -0.2% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% -0.1%
Taxes 863 877 809 816 865 908 953 992 1,031 1,062 1,094 Tax Rate 30.0% 32.0% 31.0% 31.0% 31.0% 31.0% 31.0% 31.0% 31.0% 31.0% 31.0%
Net Income 1,558 1,574 1,590 1,816 1,925 2,021 2,122 2,207 2,295 2,364 2,435 % Grow th 1.0% 1.0% 14.2% 6.0% 5.0% 5.0% 4.0% 4.0% 3.0% 3.0%
Add Depreciation/Amort 962 945 920 691 732 769 807 840 873 899 926 % of Sales 0.5% 0.5% 0.4% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3%
Plus/(minus) Changes WC 746 922 1,132 1,199 1,271 1,335 1,402 1,458 1,516 1,562 1,608 % of Sales 0.4% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5%
Subtract Cap Ex 595 580 560 691 732 769 807 840 873 899 926 Capex % of sales 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3%
Free Cash Flow 2,671 2,861 3,081 3,015 3,196 3,356 3,524 3,665 3,811 3,926 4,044 % Grow th 7.1% 7.7% -2.1% 6.0% 5.0% 5.0% 4.0% 4.0% 3.0% 3.0%
NPV of Cash Flows 20,789 32%NPV of terminal value 45,080 68% 114,296 Projected Equity Value 65,869 100%Free Cash Flow Yield 5.95% 3.54%
Current P/E 28.8 28.5 28.2 46.9 Projected P/E 42.3 41.8 41.4 Current EV/EBITDA 20.2 21.1 3.3 Terminal EV/EBITDA 29.5 Projected EV/EBITDA 28.9 30.1 4.8
Shares Outstanding 244
Current Price 183.75$ Implied equity value/share 269.74$ Upside/(Downside) to DCF 46.8%
Debt 9,800.00$ Cash 5,640.00$ Cash/share 23.10$
Terminal P/E
McKesson Corp (MCK)
Terminal Discount Rate =Terminal FCF Growth =
Terminal Value
Free Cash Yield
17
Citation
[1] www.mckesson.com/about-‐mckesson/key-‐facts/
[2] http://www.fool.com/investing/general/2011/12/12/how-does-mckesson-boost-its-ret
[3] https://hbr.org/1985/07/how-information-gives-you-competitive-advantage
[4] http://www.wikinvest.com/stock/McKesson_(MCK)
[5] http://www.mckesson.com/about-mckesson/newsroom/press-releases/2015/mckesson-announces-agreement-to-purchase-the-pharmaceutical-distribution-division-of-udg-healthcare-plc/
[6] http://www.mckesson.com/about-mckesson/newsroom/press-releases/2015/nearly-500-organizations-license-interqual-in-six-month-period/?WT.rss_ev=a
[7] http://www.mckesson.com/about-mckesson/newsroom/press-releases/2015/mckesson-launches-chronic-care-management-services/
[8] http://www.businesswire.com/news/home/20150915006894/en/McKesson-Expand-Distribution-Agreement-Albertsons
[9] http://betterbusinesshealth.mckesson.com/market-insights
[10] www.mckesson.com
[11] 10-K of FY2015
