McKesson Corp. (NYSE:MCK)

The valuation multiples from 2011 to 2016 exhibit a distinct cycle of stability, rapid expansion, and subsequent contraction. A significant peak in valuation is observed during the 2014 and 2015 fiscal years across all measured metrics, followed by a sharp correction in 2016 that returned most ratios to levels comparable to the 2011-2013 period.

Earnings and Operating Profit Multiples

The Price to earnings (P/E) and Price to operating profit (P/OP) ratios demonstrate a highly correlated trend. Both ratios remained relatively stable between 2011 and 2013, with P/E fluctuating between 15.13 and 18.40. A substantial upward shift occurred in 2014, with the P/E ratio climbing to 32.53 and peaking at 36.01 in 2015. This expansion indicates a period of significantly higher market premiums on earnings. However, this trend reversed abruptly in 2016, as the P/E ratio fell to 17.21, effectively neutralizing the gains seen in the preceding two years.

Revenue Valuation

The Price to sales (P/S) ratio remained consistently low throughout the period, reflecting a business model characterized by high revenue volume relative to market capitalization. The ratio stayed within a narrow range of 0.17 to 0.20 from 2011 to 2013, rose to a plateau of 0.30 during 2014 and 2015, and subsequently returned to 0.20 by March 31, 2016.

Book Value Expansion and Correction

The Price to book value (P/BV) ratio showed the most consistent growth trend prior to the 2016 correction. Starting at 2.89 in 2011, the ratio increased steadily each year, reaching a peak of 6.64 in 2015. This suggests a growing market premium over the company's net asset value over five years. This trend culminated in a significant decline in 2016, with the ratio dropping to 4.35, though it remained higher than the baseline levels observed between 2011 and 2013.

Overall, the data reveals a synchronized movement in valuation multiples. The sharp increase in all ratios during 2014-2015 suggests a period of aggressive valuation expansion, while the 2016 results indicate a market correction that realigned the stock price more closely with historical earnings and sales multiples.

The analysis of valuation multiples between 2011 and 2016 reveals a period of significant price volatility and valuation expansion followed by a sharp correction.

Share Price Dynamics

A consistent upward trend in share price is evident from 2011 through 2015, rising from 82.84 to a peak of 229.55. This growth trajectory reversed in 2016, with the share price declining to 172.70.

Earnings Performance

Earnings per share exhibited an overall upward trajectory, although growth was non-linear. Following a period of relative stagnation and a slight dip between 2012 and 2014, a substantial acceleration occurred in 2016, where earnings per share rose to 10.03, the highest value in the observed period.

Price-to-Earnings (P/E) Ratio Trends

The P/E ratio transitioned through three distinct phases. From 2011 to 2013, the multiple remained relatively stable, fluctuating between 15.13 and 18.40. A phase of aggressive valuation expansion occurred in 2014 and 2015, during which the ratio more than doubled to reach a peak of 36.01. This indicates that share price appreciation significantly outpaced earnings growth during these two years. In 2016, a sharp contraction occurred, returning the P/E ratio to 17.21. This normalization was the result of a simultaneous decrease in share price and a significant increase in earnings per share.

The analysis of valuation multiples between March 31, 2011, and March 31, 2016, reveals a divergence between the steady growth of operating performance and the volatility of the equity market's valuation of that performance.

Operating Profit per Share Trend

A consistent and uninterrupted upward trend in operating profit per share is observed over the six-year period. The value grew from 7.22 US$ in 2011 to 15.75 US$ in 2016, representing a sustained increase in fundamental operational efficiency.

Share Price Movement

The share price experienced significant fluctuations, contrasting with the steady profit growth. After a period of moderate growth between 2011 and 2013, a sharp acceleration occurred in 2014 and 2015, with the price peaking at 229.55 US$. A substantial correction followed in 2016, with the price descending to 172.70 US$.

Price to Operating Profit (P/OP) Ratio Analysis

The P/OP ratio exhibited three distinct phases. From 2011 to 2013, the multiple remained relatively stable, fluctuating between 9.88 and 11.47. A period of significant valuation expansion occurred in 2014 and 2015, where the ratio spiked to 17.36 and 17.91, respectively, indicating that the share price was increasing at a rate far exceeding the growth in operating profit. By 2016, the ratio contracted sharply to 10.96, returning to levels consistent with the 2011-2013 period.

The data suggests that while the operational foundation of the company strengthened consistently through 2016, the market valuation experienced a period of inflation between 2014 and 2015, followed by a normalization in 2016 where the P/OP ratio realigned with historical norms despite record-high operating profits per share.

The valuation metrics indicate a period of consistent revenue growth per share accompanied by significant volatility in share price between 2011 and 2016. While the operational performance showed a steady upward trajectory, the market valuation reflected fluctuating investor sentiment, as evidenced by the shifts in the price-to-sales (P/S) multiple.

Sales per Share Performance

A continuous upward trend is observed in sales per share, which increased from 444.57 in 2011 to 848.30 by 2016. This consistent growth demonstrates a sustained expansion in revenue generation relative to the shares outstanding over the six-year period.

Share Price Movement

The share price experienced an overall increase from 82.84 in 2011 to a peak of 229.55 in 2015. The most significant acceleration occurred between 2013 and 2015, followed by a sharp contraction in 2016, where the price declined to 172.70.

Price-to-Sales (P/S) Ratio Analysis

The P/S ratio remained relatively low throughout the analyzed period, ranging from a minimum of 0.17 in 2012 to a maximum of 0.30 in 2014 and 2015. The expansion of the ratio to 0.30 during 2014 and 2015 suggests a period where the market price appreciated at a rate exceeding the growth of sales. In 2016, the ratio contracted to 0.20, a result of the share price correction occurring simultaneously with continued growth in sales per share.

The valuation of the common stock relative to its book value exhibited a consistent upward trajectory from 2011 through 2015, followed by a significant correction in 2016. During the growth phase, the market price of the stock appreciated at a rate that substantially outpaced the growth of the company's book value per share, leading to an expansion of the valuation multiple.

Share Price and Book Value Trends

Share prices rose steadily from 82.84 US$ in 2011 to a peak of 229.55 US$ in 2015. In comparison, the book value per share demonstrated more moderate growth, increasing from 28.64 US$ in 2011 to 39.66 US$ by 2016. A slight contraction in book value per share was noted in 2015, dropping to 34.55 US$ from the previous year's 36.96 US$.

P/BV Ratio Expansion

The P/BV ratio increased from 2.89 in 2011 to 6.64 in 2015. The most pronounced acceleration occurred between 2013 and 2015, during which the ratio climbed from 3.48 to 6.64, indicating a significant increase in the premium the market was willing to pay over the accounting value of the equity.

Valuation Correction in 2016

A sharp decline in the P/BV ratio to 4.35 is observed in 2016. This contraction was driven by a decrease in the share price to 172.70 US$, which occurred despite the book value per share reaching its highest point in the analyzed period at 39.66 US$.