Is There Still Opportunity in McKesson Stock After Its 53% Rally in 2024?

If you are trying to figure out what to do with your McKesson shares, you are not alone. The stock has turned more than a few heads lately, especially among investors who like to see a strong heartbeat in a company’s price chart. Over the past year, McKesson delivered a return of 53.9%. Looking over three years, shareholders have enjoyed a remarkable 116.7% rise. For those in it for the long haul, the past five years brought an eye-popping 407.5% total return. Even year-to-date, the stock is up 30.9%, despite slipping 2.7% in the last week after a sharp run-up of nearly 8% in just the past month.

What is fueling all this? Partly, it is McKesson’s central role in health care distribution, a sector back in the spotlight thanks to changing pharmacy trends and shifting supply chain strategies. These themes are creating opportunities and, for some, a bit of FOMO.

But here is where things get interesting. By some traditional valuation methods, McKesson now scores a 3 out of 6, meaning it appears undervalued in exactly half of the standard checks analysts look at. That might seem middling at first, but context is key. There is more to valuation than a simple checklist.

Let us dive into those valuation techniques and what they can reveal about the current price. And stick around, because at the end of the article, we will consider whether there is an even better way to capture McKesson’s true value potential.

McKesson delivered 53.9% returns over the last year. See how this stacks up to the rest of the Healthcare industry.

Approach 1: McKesson Discounted Cash Flow (DCF) Analysis

The Discounted Cash Flow (DCF) model estimates a company's intrinsic value by projecting its future cash flows and discounting them back to today's value. For McKesson, this involves taking a detailed look at how much cash the company is expected to generate over time and using financial modeling to determine what those future dollars are worth right now.

Currently, McKesson's Free Cash Flow sits at approximately $5.7 billion. Analyst projections suggest steady growth, with Free Cash Flow expected to rise to over $5.3 billion by 2030. Analysts supply direct estimates for the next five years. Beyond that period, Simply Wall St extrapolates additional forecasts to provide a full picture through 2035. This span allows a robust assessment of cash generation over the next decade.

Using the 2 Stage Free Cash Flow to Equity model, the DCF approach calculates that McKesson's intrinsic value is about $999.12 per share. The DCF model implies a discount of 25.8 percent, so the stock appears to be undervalued compared to this projection.

Result: UNDERVALUED

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for McKesson.

Our Discounted Cash Flow (DCF) analysis suggests McKesson is undervalued by 25.8%. Track this in your watchlist or portfolio, or discover more undervalued stocks.

Approach 2: McKesson Price vs Earnings

For profitable companies like McKesson, the Price-to-Earnings (PE) ratio is a widely used valuation metric. It provides a snapshot of how much investors are willing to pay today for a dollar of current earnings, and is especially meaningful when a business has stable and growing profits.

However, a “normal” or “fair” PE ratio is not one-size-fits-all. It depends on factors such as how quickly a company is expected to grow, the reliability of its earnings, and the risks it faces. Higher growth and lower risk typically justify a higher PE ratio. Lower growth or greater uncertainty demand a discount.

McKesson currently trades at a PE ratio of 29.1x, which stands above both the Healthcare industry average of 21.3x and its major peer average of 22.9x. On the surface, this might suggest the stock is on the expensive side. Simply Wall St's proprietary Fair Ratio for McKesson is 31.0x, which sets a tailored benchmark based on the company’s growth outlook, profitability, industry position, and overall risk profile.

Unlike broad industry averages or peer group medians, the Fair Ratio takes a holistic view, factoring in McKesson’s robust earnings growth, industry context, and company size. This helps investors set more realistic expectations for what the market should pay for McKesson’s future prospects.

Comparing McKesson’s actual PE of 29.1x to its Fair Ratio of 31.0x, the difference is modest and suggests that the stock is valued about right relative to the company’s underlying factors.

Result: ABOUT RIGHT

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your McKesson Narrative

Earlier, we mentioned that there is an even better way to understand valuation. Let us introduce you to Narratives. A Narrative is a way to frame your investment decision as a story about McKesson’s future, combining your outlook on the business with your assumptions for revenue, profit margins, and how the world will impact those numbers over time.

Instead of looking only at historic ratios or price targets, Narratives let you connect the company’s story to your own forecast and, from there, to a personalized fair value. This approach is available to millions of investors on Simply Wall St’s Community page, making it easy for you to shape, test, and share your perspective.

With Narratives, investors get a clear, dynamic signal of whether McKesson’s current price looks attractive or not by comparing their Fair Value against the real-time market price. This helps you decide when to buy or sell with confidence. Each Narrative also automatically updates as new information, such as results or news, comes in so you always have the latest view.

For example, some investors are highly optimistic about McKesson’s continued growth and digital automation, estimating a fair value as high as $830 per share, while others are more cautious based on regulatory risk or shifting industry trends, seeing fair value closer to $640. This shows just how much “the story behind the numbers” can shape your outlook.

Do you think there's more to the story for McKesson? Create your own Narrative to let the Community know!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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