With 25% YTD Gains, Is McKesson a Smart Investment Now? McKesson (MCK) reported consistent revenue growth and solid profit margins in the last reported quarter, supported by robust demand for pharmaceuticals and medical supplies and efficient cost management. With nearly...
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McKesson (MCK) reported consistent revenue growth and solid profit margins in the last reported quarter, supported by robust demand for pharmaceuticals and medical supplies and efficient cost management. With nearly 25% year-to-date gains, should you invest in this healthcare stock? Read on to learn more….
The medical industry contributes significantly to the economy by offering necessary products and services that advance people's health and well-being. The sector has seen notable changes in recent years because of significant technological developments, increased awareness of preventive care, and other biotechnological discoveries and innovations.
Demand for medical services will likely remain high due to an aging population, the growing frequency of rare and chronic illnesses, and enhanced health awareness. The global healthcare services market is expected to grow from $8.35 trillion in 2023 to $8.96 trillion in 2024 at a CAGR of 7.4%. The market is projected to reach $10.91 trillion by 2028, expanding at a 5% CAGR.
With a $373.69 billion market cap, McKesson Corporation (MCK) specializes in the distribution of pharmaceuticals and medical supplies. It operates through four segments: U.S. Pharmaceutical; Prescription Technology Solutions (RxTS); Medical-Surgical Solutions; and International.
McKesson maintains a solid position in the healthcare sector, fueled by its broad range of products and services, extensive distribution network, and solid customer base. The company ended fiscal 2024 on a solid note, with full-year revenues of $309 billion, up 12% year-over-year. Its adjusted EPS for the year rose 6% year-over-year to $27.44.
Highlighting solid fourth-quarter performance, Brian Tyler, CEO of MCK, said, "The results underscore the execution against our company priorities, differentiated capabilities within the oncology and biopharma services platforms, and the sustained strength of our core distribution businesses. We continue to leverage the breadth and depth of our assets, delivering meaningful outcomes for our customers, partners, patients, and communities."
"Looking ahead to fiscal 2025, we are well-positioned to further expand on the extensive range of our assets and capabilities, execute against our strategic initiatives, foster sustainable growth, and create long-term value for all stakeholders," added Tyler.
For the fiscal year 2025, the company expects adjusted EPS to be $31.25 to $32.05, indicating a 14% to 17% growth compared to the previous year.
Shares of MCK have gained 18.4% over the past six months and 25% year-to-date to close the last trading session at $578.26.
Let's look at factors that could influence MCK's performance in the upcoming months.
Robust Financial Performance
For the fourth quarter that ended March 31, 2024, MCK's revenue increased 10.8% year-over-year to $76.36 billion. Revenue from the U.S. Pharmaceutical segment was $68.79 billion, up 12% year-over-year increase, primarily driven by higher prescription volumes, including increased volumes from specialty products, retail national account customers, and GLP-1 medications.
Also, revenue from the Medical-Surgical Solutions segment was $2.83 billion, up 6% from the year-ago value. MCK's gross profit grew 16.9% year-over-year to $3.59 billion. Its operating income came in at $1.22 billion, an increase of 24.1% year-over-year. The company reported adjusted earnings of $813 million, or $6.18 per share, respectively.
Favorable Analyst Expectations
Analysts expect MCK's revenue and EPS for the second quarter (ending September 2024) to grow 18.5% and 23.6% year-over-year to $91.49 billion and $7.70, respectively. Moreover, the company topped consensus revenue and EPS estimates in three of the trailing four quarters.
For the fiscal year ending March 2025, Street expects MCK's revenue and EPS to grow 16.9% and 15.6% from the prior year to $361.26 billion and $31.73, respectively. In addition, the company's revenue and EPS for the fiscal year 2026 are expected to increase 8.2% and 12.9% year-over-year to $390.83 billion and $35.83, respectively.
Impressive Historical Growth
Over the past five years, MCK's revenue has grown at a CAGR of 7.6%. The company's levered free cash flow has increased at a CAGR of 8% over the same period, and its EBITDA has improved at a 4.7% CAGR. Furthermore, the company's net income and EPS have increased at CAGRs of 145% and 164.4%, respectively, over the same time frame.
Attractive Valuation
In terms of forward non-GAAP P/E, MCK is trading at 18.21x, 7% lower than the industry average of 19.58x. The stock's forward EV/Sales multiple of 0.22 is 93.9% lower than the industry average of 3.57. Likewise, its forward EV/EBITDA of 13.23x is 1% lower than the industry average of 13.36x.
Additionally, the stock's forward Price/Sales multiple of 0.21 is 94.6% lower than the industry average of 3.85. Its forward Price/Cash Flow of 15x is 4.7% lower than the industry average of 15.75x.
POWR Ratings Reflect Promise
MCK's sound fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to Buy in our proprietary rating system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. MCK has a B grade for Value, consitent with its lower-than-industry valuation. The stock also has a B grade for Stability, justified by its 24-month beta of 0.22.
Within the Medical - Services industry, MCK is ranked #4 out of 63 stocks.
Beyond what I have stated above, we have also given MCK grades for Growth, Quality, Sentiment, and Momentum. Get all MCK ratings here.
Bottom Line
MCK plays a crucial role in the healthcare industry by ensuring the reliable distribution of essential medical products and solutions. Its solid customer base includes retail pharmacies, hospital networks, pharmaceutical manufacturers, and health systems. McKesson consistently reports robust revenue and earnings, driven by its vital role in the healthcare supply chain.
Given its solid financials, lower valuation, and promising growth prospects, investing in MCK would be wise now for potential gains.
How Does McKesson Corporation (MCK) Stack Up Against Its Peers?
While MCK has an overall POWR Rating of B, investors could also check out these other stocks within the Medical - Services industry with B (Buy) ratings: HealthStream, Inc. (HSTM), AmerisourceBergen Corp. (ABC), and National HealthCare Corporation (NHC).
To explore more A and B-rated healthcare stocks, click here.
What To Do Next?
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MCK shares were unchanged in premarket trading Tuesday. Year-to-date, MCK has gained 25.32%, versus a 19.09% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet's keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet's looks to help retail investors understand the underlying factors before making investment decisions.
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