Stock Analysis on Net
Stock Analysis on Net

McKesson Corp. (NYSE:MCK)

This company has been moved to the archive! The financial data has not been updated since October 27, 2016.

Present Value of Free Cash Flow to Equity (FCFE)

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In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to equity (FCFE) is generally described as cash flows available to the equity holder after payments to debt holders and after allowing for expenditures to maintain the company asset base.

Intrinsic Stock Value (Valuation Summary)

McKesson Corp., free cash flow to equity (FCFE) forecast

US$ in millions, except per share data

Microsoft Excel
Year Value FCFEt or Terminal value (TVt) Calculation Present value at 11.32%
01 FCFE0 1,270
1 FCFE1 1,487 = 1,270 × (1 + 17.08%) 1,336
2 FCFE2 1,706 = 1,487 × (1 + 14.70%) 1,376
3 FCFE3 1,916 = 1,706 × (1 + 12.32%) 1,389
4 FCFE4 2,106 = 1,916 × (1 + 9.94%) 1,371
5 FCFE5 2,265 = 2,106 × (1 + 7.56%) 1,325
5 Terminal value (TV5) 64,725 = 2,265 × (1 + 7.56%) ÷ (11.32% – 7.56%) 37,859
Intrinsic value of McKesson Corp. common stock 44,656
 
Intrinsic value of McKesson Corp. common stock (per share) $197.52
Current share price $160.50

Based on: 10-K (reporting date: 2016-03-31).

1 See details »

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

Required Rate of Return (r)

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Assumptions
Rate of return on LT Treasury Composite1 RF 4.81%
Expected rate of return on market portfolio2 E(RM) 13.55%
Systematic risk of McKesson Corp. common stock βMCK 0.75
 
Required rate of return on McKesson Corp. common stock3 rMCK 11.32%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

2 See details »

3 rMCK = RF + βMCK [E(RM) – RF]
= 4.81% + 0.75 [13.55% – 4.81%]
= 11.32%

FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

McKesson Corp., PRAT model

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Average Mar 31, 2016 Mar 31, 2015 Mar 31, 2014 Mar 31, 2013 Mar 31, 2012 Mar 31, 2011
Selected Financial Data (US$ in millions)
Cash dividends declared 249 226 214 192 202 188
Net income attributable to McKesson Corporation 2,258 1,476 1,263 1,338 1,403 1,202
Revenues 190,884 179,045 137,609 122,455 122,734 112,084
Total assets 56,563 53,870 51,759 34,786 33,093 30,886
Total McKesson Corporation stockholders’ equity 8,924 8,001 8,522 7,070 6,831 7,220
Financial Ratios
Retention rate1 0.89 0.85 0.83 0.86 0.86 0.84
Profit margin2 1.18% 0.82% 0.92% 1.09% 1.14% 1.07%
Asset turnover3 3.37 3.32 2.66 3.52 3.71 3.63
Financial leverage4 6.34 6.73 6.07 4.92 4.84 4.28
Averages
Retention rate 0.85
Profit margin 1.04%
Asset turnover 3.51
Financial leverage 5.53
 
FCFE growth rate (g)5 17.08%

Based on: 10-K (reporting date: 2016-03-31), 10-K (reporting date: 2015-03-31), 10-K (reporting date: 2014-03-31), 10-K (reporting date: 2013-03-31), 10-K (reporting date: 2012-03-31), 10-K (reporting date: 2011-03-31).

2016 Calculations

1 Retention rate = (Net income attributable to McKesson Corporation – Cash dividends declared) ÷ Net income attributable to McKesson Corporation
= (2,258 – 249) ÷ 2,258
= 0.89

2 Profit margin = 100 × Net income attributable to McKesson Corporation ÷ Revenues
= 100 × 2,258 ÷ 190,884
= 1.18%

3 Asset turnover = Revenues ÷ Total assets
= 190,884 ÷ 56,563
= 3.37

4 Financial leverage = Total assets ÷ Total McKesson Corporation stockholders’ equity
= 56,563 ÷ 8,924
= 6.34

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.85 × 1.04% × 3.51 × 5.53
= 17.08%

FCFE growth rate (g) implied by single-stage model

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (36,287 × 11.32% – 1,270) ÷ (36,287 + 1,270)
= 7.56%

where:
Equity market value0 = current market value of McKesson Corp. common stock (US$ in millions)
FCFE0 = the last year McKesson Corp. free cash flow to equity (US$ in millions)
r = required rate of return on McKesson Corp. common stock

FCFE growth rate (g) forecast

McKesson Corp., H-model

Microsoft Excel
Year Value gt
1 g1 17.08%
2 g2 14.70%
3 g3 12.32%
4 g4 9.94%
5 and thereafter g5 7.56%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5 – g1) × (2 – 1) ÷ (5 – 1)
= 17.08% + (7.56% – 17.08%) × (2 – 1) ÷ (5 – 1)
= 14.70%

g3 = g1 + (g5 – g1) × (3 – 1) ÷ (5 – 1)
= 17.08% + (7.56% – 17.08%) × (3 – 1) ÷ (5 – 1)
= 12.32%

g4 = g1 + (g5 – g1) × (4 – 1) ÷ (5 – 1)
= 17.08% + (7.56% – 17.08%) × (4 – 1) ÷ (5 – 1)
= 9.94%