McKesson (MCK) is one of the stocks most watched by Zacks.com visitors lately. So, it might be a good idea to review some of the factors that might affect the near-term performance of the stock.
Shares of this prescription drug distributor have returned -7.3% over the past month versus the Zacks S&P 500 composite's +1.3% change. The Zacks Medical - Dental Supplies industry, to which McKesson belongs, has lost 2.9% over this period. Now the key question is: Where could the stock be headed in the near term?
Although media reports or rumors about a significant change in a company's business prospects usually cause its stock to trend and lead to an immediate price change, there are always certain fundamental factors that ultimately drive the buy-and-hold decision.
Earnings Estimate Revisions
Rather than focusing on anything else, we at Zacks prioritize evaluating the change in a company's earnings projection. This is because we believe the fair value for its stock is determined by the present value of its future stream of earnings.
Our analysis is essentially based on how sell-side analysts covering the stock are revising their earnings estimates to take the latest business trends into account. When earnings estimates for a company go up, the fair value for its stock goes up as well. And when a stock's fair value is higher than its current market price, investors tend to buy the stock, resulting in its price moving upward. Because of this, empirical studies indicate a strong correlation between trends in earnings estimate revisions and short-term stock price movements.
McKesson is expected to post earnings of $8.28 per share for the current quarter, representing a year-over-year change of +7%. Over the last 30 days, the Zacks Consensus Estimate has changed -3%.
The consensus earnings estimate of $32.73 for the current fiscal year indicates a year-over-year change of +19.3%. This estimate has changed -0.1% over the last 30 days.
For the next fiscal year, the consensus earnings estimate of $36.65 indicates a change of +12% from what McKesson is expected to report a year ago. Over the past month, the estimate has changed +0.1%.
With an impressive externally audited track record, our proprietary stock rating tool -- the Zacks Rank -- is a more conclusive indicator of a stock's near-term price performance, as it effectively harnesses the power of earnings estimate revisions. The size of the recent change in the consensus estimate, along with three other factors related to earnings estimates, has resulted in a Zacks Rank #1 (Strong Buy) for McKesson.
The chart below shows the evolution of the company's forward 12-month consensus EPS estimate:
12 Month EPS
Projected Revenue Growth
While earnings growth is arguably the most superior indicator of a company's financial health, nothing happens as such if a business isn't able to grow its revenues. After all, it's nearly impossible for a company to increase its earnings for an extended period without increasing its revenues. So, it's important to know a company's potential revenue growth.
In the case of McKesson, the consensus sales estimate of $95.46 billion for the current quarter points to a year-over-year change of +18%. The $358.91 billion and $393.01 billion estimates for the current and next fiscal years indicate changes of +16.2% and +9.5%, respectively.
Last Reported Results and Surprise History
McKesson reported revenues of $93.65 billion in the last reported quarter, representing a year-over-year change of +21.3%. EPS of $7.07 for the same period compares with $6.23 a year ago.
Compared to the Zacks Consensus Estimate of $89.48 billion, the reported revenues represent a surprise of +4.66%. The EPS surprise was +2.61%.
Over the last four quarters, McKesson surpassed consensus EPS estimates three times. The company topped consensus revenue estimates two times over this period.
Valuation
Without considering a stock's valuation, no investment decision can be efficient. In predicting a stock's future price performance, it's crucial to determine whether its current price correctly reflects the intrinsic value of the underlying business and the company's growth prospects.
While comparing the current values of a company's valuation multiples, such as price-to-earnings (P/E), price-to-sales (P/S) and price-to-cash flow (P/CF), with its own historical values helps determine whether its stock is fairly valued, overvalued, or undervalued, comparing the company relative to its peers on these parameters gives a good sense of the reasonability of the stock's price.
The Zacks Value Style Score (part of the Zacks Style Scores system), which pays close attention to both traditional and unconventional valuation metrics to grade stocks from A to F (an An is better than a B; a B is better than a C; and so on), is pretty helpful in identifying whether a stock is overvalued, rightly valued, or temporarily undervalued.
McKesson is graded A on this front, indicating that it is trading at a discount to its peers. Click here to see the values of some of the valuation metrics that have driven this grade.
Conclusion
The facts discussed here and much other information on Zacks.com might help determine whether or not it's worthwhile paying attention to the market buzz about McKesson. However, its Zacks Rank #1 does suggest that it may outperform the broader market in the near term.
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McKesson Corporation (MCK) : Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
