McKesson Corporation MCK is scheduled to report third-quarter fiscal 2025 results on Feb. 5, after market close.
The company delivered an earnings surprise of 2.61% in the last reported quarter. Its earnings beat estimates in three of the trailing four quarters and missed once, delivering an average surprise of 4.99%.
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McKesson Corporation Price and EPS Surprise
McKesson Corporation price-eps-surprise | McKesson Corporation Quote
McKesson’s revenue growth has been driven largely by the rapid adoption of GLP-1 weight loss drugs and sustained demand for branded pharmaceuticals, both of which have fueled sales over the past several quarters. Additionally, the rising demand for specialty pharmaceuticals has contributed significantly to revenue expansion.
A rebound in primary care visits has also supported top-line growth in the last two reported quarters. Furthermore, the company’s investment in expanding distribution centers and integrating artificial intelligence (AI) into its services and products has recently bolstered revenues. However, earnings remain affected by higher cost of sales, primarily due to increased sales of lower-margin products.
Q3 Estimates
The Zacks Consensus Estimate for earnings is pegged at $8.11 per share, implying a significant improvement of 4.8% year over year. The consensus mark for revenues is pegged at $95.46 billion, indicating a surge of 18% year over year.
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Factors Likely to Have Driven Q3 Segmental Performance
U.S. Pharmaceutical
McKesson generates a significant portion of its revenues from the U.S. Pharmaceutical segment, which distributes drugs and healthcare-related products across the United States. Prescription volume, a key performance indicator for this segment, likely maintained steady growth, consistent with the previous quarter. Strong demand for specialty pharmaceuticals, particularly cancer therapies, is likely to have been a key driver of prescription volume in the third quarter.
The surging demand for GLP-1 medications in the U.S. market likely supported McKesson’s top-line growth by increasing the volume of these drugs shipped. Additionally, the company’s expansion of distribution centers and development in Canada likely served as positive factors during the quarter.
However, the divestiture of its European business is likely to have resulted in loss of sales during the soon-to-be-reported quarter. In September, McKesson sold its Canada-based Rexall and Well.ca businesses as part of its broader strategy to streamline operations and focus on high-growth areas such as oncology and biopharma services. These divestments are expected to have further impacted sales in the fiscal third quarter. The branded-to-generic conversions might have weighed on its performance. The lower margin for GLP-1 medications must have continued to hurt the gross margin during the quarter.
Our estimate for this segment’s revenues is pegged at $86.7 billion, indicating an improvement of 18.8% from the prior-year level.
Prescription Technology Solutions
This segment connects patients, pharmacies, providers, pharmacy benefit managers, health plans and biopharma companies, and solves medication access, affordability and adherence challenges for patients.
This segment’s revenues are likely to have been driven by a strong demand for technology services. Additionally, the growing demand for access solutions, supported by newly launched products, is expected to have persisted in the third quarter. However, lower contributions from third-party logistics businesses might have negatively impacted the segmental income.
Our top-line estimate for the Prescription Technology Solutions segment is pegged at $1.34 billion, implying an 11.3% improvement year over year.
Medical Surgical Solutions
The Medical-Surgical Solutions segment provides medical-surgical supply distribution, logistics and other services to healthcare providers. The segment reflected a sequential recovery in primary care visits during the last couple of quarters. The trend is likely to have continued in the third quarter, driving the specialty pharmaceuticals volume higher.
Although recovery in care visits looks promising, the patient volume might have acted as a headwind. The segmental result may also reflect unfavorable customer mix and product demand shifts in the primary care channel.
Our top-line estimate for the Medical Surgical Solutions segment is pegged at $3.14 billion.
A weaker illness season this fiscal year (compared with the previous year) is likely to have acted as a headwind for operating profit growth during the third quarter. Meanwhile, interest expenses followed multiple rate hikes over the past couple of years, which must have hurt the bottom line.
What Our Quantitative Model Suggests
Per our proven model, the combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of an earnings beat. That is not the case here, as you will see below.
Earnings ESP: McKesson has an Earnings ESP of -1.75%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Zacks Rank: The company currently carries a Zacks Rank #3.
Long-Term Growth Potential
McKesson is a leading U.S. drug distributor, recognized for its vast distribution network and comprehensive healthcare support services. Its commitment to innovation has been a key factor in its strong performance over the years. The company continues to enhance efficiency through strategic investments in automation and technology, which are expected to drive future growth.
Last year, McKesson expanded its distribution network by opening two new technologically advanced centers in the United States. This expansion is expected to streamline drug distribution, particularly for specialty pharmaceuticals. In August, the company signed a definitive agreement to acquire a controlling 70% stake in Community Oncology Revitalization Enterprise Ventures, a move that management views as crucial toward strengthening community-based oncology care.
McKesson has also built a unique portfolio of assets to support the growing Oncology and Biopharma markets. Additionally, its multi-year initiative to modernize distribution centers across Canada presents a promising opportunity for revenue growth.
With a network encompassing over 50,000 pharmacies and approximately 900,000 healthcare providers, McKesson plays a critical role in drug distribution, gaining access to a vast patient population. This scale positions the company to attract more pharmaceutical manufacturers, further driving revenue growth.
Moreover, it is integrating cutting-edge technology, particularly AI, to better serve its customers. AI-driven tools are being implemented to assist healthcare providers with revenue cycle management and clinical solution evaluations. These AI capabilities are also expected to help providers navigate complex insurance coverage and reimbursement processes more efficiently. Additionally, MCK plans to leverage AI for automated clinical note generation and various supply-chain applications.
Our Take
MCK’s shares have lost 2.7% in the past six months against the industry’s growth of 5.7%. The underperformance can be attributed to margin challenges despite strong top-line growth.
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The company’s plans should help it continue on its uptrend going forward. Per the Zacks Style Score, a Zacks proprietary method to evaluate stocks, the company looks undervalued (Value Score: A) with a strong chance of continued uptrend (Growth Score: B). The pace is also likely to be robust (Momentum Score: B).
As the Zacks Rank, coupled with the style score for MCK, does not conclusively predict that the company may beat on earnings this reporting cycle, we caution against any new investment bet in MCK at present. However, those who have already invested in the stock may continue to hold it in their portfolio.
Stocks to Consider
Here are a few medical stocks worth considering, as these have the right combination of elements to come up with an earnings beat this reporting cycle.
Natera NTRA has an Earnings ESP of +61.91% and a Zacks Rank #1 at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
NTRA’s earnings surpassed estimates in each of the trailing four quarters, the average surprise being 36.37%. The Zacks Consensus Estimate for fourth-quarter EPS implies a rise of 34.4% from the year-ago reported figure.
Masimo MASI has an Earnings ESP of +4.05% and a Zacks Rank #2 at present.
The company is scheduled to release fourth-quarter 2024 results on Feb. 25. Its earnings surpassed estimates in each of the trailing four quarters, the average surprise being 17.10%. The Zacks Consensus Estimate for EPS implies an improvement of 14.4% from the year-ago reported figure.
Maravai LifeSciences MRVI has an Earnings ESP of +10.00% and a Zacks Rank #2 at present. The company is expected to release fourth-quarter 2024 results in February.
MRVI delivered a trailing four-quarter average earnings surprise of 116.67%. The Zacks Consensus Estimate for fourth-quarter EPS implies a decline of 400% from the year-ago reported figure.
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