2023-03-10 04:27:35 ET
Summary
- McKesson Corporation has a strong position in the industry, and with a strong last quarterly performance, the current share price seems to offer a good entry point.
- There are many tailwinds for the company, but a major one is again US population where people will need the services more and for longer.
- If you are looking to add a stable company with a steady growth path ahead, MCK stock, right now, seems to offer little risk and good upside.
Investment Thesis
Based on the company's strong financial performance, solid market position, and favorable market outlook, the investment thesis for the company is bullish. McKesson Corporation ( MCK ) has demonstrated consistent revenue growth and profitability, and its diversified business lines position it well for potential future industry disruptions. While there are risks to the business, including regulatory changes and competition, the company's strong financial position and experienced management team should help mitigate these risks. Additionally, the company's attractive valuation compared to peers in the industry provides a favorable entry point for investors. Overall, the company presents a compelling investment opportunity for those looking to invest in a stable, established player in the healthcare industry.
Market Tailwinds
McKesson Corporation operates in the healthcare industry, providing pharmaceuticals and medical supplies to healthcare providers and pharmacies. The company has a broad and diverse customer base, including retail pharmacies, hospitals, clinics, and long-term care facilities.
One potential tailwind for McKesson is the aging population in the United States, which is expected to drive an increase in demand for healthcare services and prescription drugs. Additionally, the ongoing COVID-19 pandemic has highlighted the importance of supply chain management in the healthcare industry, which could increase demand for McKesson's distribution and logistics services.
Market Outlook (Grand View Research)
According to a report by Grand View Research , the global pharmaceutical market is expected to reach $2.2 trillion by 2028, driven by factors such as rising demand for personalized medicines and an increasing prevalence of chronic diseases. The report also notes that the outsourcing of pharmaceutical distribution and logistics services is expected to increase, creating opportunities for companies like McKesson.
Analysts are generally optimistic about the outlook for the healthcare industry, with many predicting continued growth in demand for healthcare services and prescription drugs. According to a report by Market Research Future, the global healthcare distribution market is expected to grow at a CAGR of 6.5% from 2021 to 2027.
Overall, while the healthcare industry faces challenges such as increasing regulatory scrutiny and pricing pressures, the growing demand for healthcare services and the outsourcing of distribution and logistics services present potential tailwinds for companies like McKesson.
Revenue Breakdown
McKesson Corporation reported solid third-quarter results for the period ending December 31, 2022. The company's total revenues increased by 3% to $70.5 billion compared to the same period last year. The increase was primarily driven by growth in the U.S. Pharmaceutical segment, resulting from increased specialty product volumes, including retail national account customers, market growth, and strength across the oncology platform including increased patient visits.
Quarter Highlight (Earnings Report)
Net income for the quarter was $1.1 billion, down 7% from the same quarter last year. Earnings per diluted share from continuing operations were $7.65, compared to $7.69 in the same period last year. However, the company's adjusted earnings per diluted share of $6.90 increased 12%, reflecting a favorable impact from share repurchases and lower interest expense.
Brian Tyler , the company's CEO, commented on the results, saying:
McKesson delivered another solid quarter, driven by the dedication of our talented associates committed to advancing healthcare for all. Our performance was highlighted by execution across our scaled distribution businesses and differentiated capabilities in the oncology and biopharma services platforms."
2023 Outlook (Earnings Report)
Looking ahead, McKesson raised its fiscal 2023 Adjusted Earnings per Diluted Share guidance range to $25.75 to $26.15, from the previous range of $24.45 to $24.95. The increase was due to several factors, including $0.70 to $0.80 related to the U.S. government's COVID-19 vaccine distribution program, $1.10 to $1.20 related to the U.S. government's kitting, storage, and distribution of ancillary supplies program and COVID-19 tests, and $0.65 related to the termination of the tax receivable agreement with Change Healthcare. The company's fiscal 2023 Adjusted Earnings per Diluted Share Excluding Certain Items guidance indicates 13% to 16% forecasted growth compared to the prior year.
The company's year-to-date revenues were $207.8 billion, a 5% increase from the same period last year. Net income for the year-to-date period was $2.8 billion, a 271% increase compared to the same period last year. The company's adjusted earnings for the year-to-date period were $2.7 billion, a 3% decrease from the same period last year.
Overall, the company's third-quarter results were strong, with solid revenue growth in its U.S. Pharmaceutical segment and a favorable impact from share repurchases and lower interest expense reflected in its adjusted earnings per diluted share. The company's raised fiscal 2023 Adjusted Earnings per Diluted Share guidance range also indicates positive growth and reinforces the company's ability to deliver on its financial targets, resulting in value creation for stakeholders.
Risks
One regulatory risk is related to changes in government policies and regulations, particularly in the healthcare industry. The company operates in a highly regulated industry, and changes in regulations could affect the company's operations, profitability, and financial performance. The company may also face legal risks related to government investigations and lawsuits, as well as potential liability for product recalls, manufacturing defects, and other issues.
Assets (Balance Sheet)
Another operational risk is related to supply chain disruptions and shortages, which could impact the availability of products and services offered by the company. This risk has become more pronounced in recent years due to the COVID-19 pandemic and related supply chain disruptions. The company may also face increased competition from new entrants in the market, which could impact market share and profitability.
Price Chart (Seeking Alpha)
On the other hand, there are potential tailwinds for the company. One of the key factors driving growth in the healthcare industry is an aging population, which is expected to increase demand for healthcare products and services in the coming years. In addition, advances in technology and innovation could create new opportunities for the company to expand its product offerings and improve patient outcomes.
Valuation and Conclusion
McKesson Corporation is currently trading at a price-to-earnings (P/E) ratio of around 13.7, which is slightly lower than the industry average of 14.3. The company's price-to-sales (P/S) ratio of 0.13 is also lower than the industry average of 0.25. However, its price-to-book (P/B) ratio of 4.8 is higher than the industry average of 3.2.
When compared to its peers, McKesson's valuation metrics are generally in line with the industry average. For example, AmerisourceBergen (ABC) has a P/E ratio of 13.1 and a P/S ratio of 0.15, while Cardinal Health (CAH) has a P/E ratio of 15.6 and a P/S ratio of 0.13. These metrics suggest that McKesson is trading at a slightly lower valuation than AmerisourceBergen and Cardinal Health.
Based on these valuation metrics, it is difficult to definitively say whether McKesson is a buy or a sell. However, considering the company's strong financial performance, positive outlook, and potential tailwinds from trends in the healthcare industry, many analysts have a positive view of the company's future prospects.
Additionally, the company's attractive valuation compared to peers in the industry provides a favorable entry point for investors. Overall, the company presents a compelling investment opportunity for those looking to invest in a stable, established player in the healthcare industry.
For further details see:
McKesson Corporation Is A Stable Long-Term Addition