MCK Financial Analysis

Analysis Date: 2/6/2025

Business Model

McKesson Corporation is a diversified healthcare services leader. Revenue is generated through four segments: U.S. Pharmaceutical, Prescription Technology Solutions, Medical-Surgical Solutions, and International.

Revenue Sources

• U.S. Pharmaceutical: Distribution of pharmaceuticals and healthcare-related products to retail chains, independent retail pharmacies, healthcare providers, and health systems. Growth driven by increased prescription volumes, specialty products, and oncology platform.
• Prescription Technology Solutions: Offers access, affordability, and adherence solutions, including third-party logistics and technology services. Revenue driven by increased prescription volumes and access and affordability solutions.
• Medical-Surgical Solutions: Distribution of medical-surgical supplies, equipment, and services to alternate site providers like physician offices, surgery centers, and extended care facilities. Revenue impacted by illness season and primary care channel performance.
• International: Primarily pharmaceutical distribution in Canada. Revenue driven by higher pharmaceutical distribution volumes in the Canadian business.

Income Statement Analysis

• Revenue increased significantly by 18% year-over-year, driven by growth in the U.S. Pharmaceutical segment.
• Cost of sales also increased by 18%, keeping gross profit growth at 4%.
• Selling, distribution, general, and administrative expenses decreased by 19% year-over-year, a significant positive trend contributing to operating profit growth.
• Operating income saw a substantial increase of 91% year-over-year, primarily due to revenue growth and decreased operating expenses as a percentage of revenue.
• Net income attributable to McKesson Corporation increased by 49%, reflecting improved profitability.

Balance Sheet Analysis

• Cash and cash equivalents decreased significantly, potentially due to share repurchases and investments, as noted in cash flow analysis.
• Receivables and Inventories increased, reflecting revenue growth and potentially increased business activity.
• Total current assets increased, driven by receivables and inventories.
• Goodwill and Intangible assets decreased slightly.
• Total assets increased moderately.
• Short-term borrowing increased significantly, potentially used to fund operations or investments.
• Current portion of long-term debt increased substantially, indicating upcoming debt maturities.
• Long-term debt decreased, possibly due to repayments.
• Long-term litigation liabilities decreased slightly.
• Total current liabilities increased, driven by drafts and accounts payable and short-term borrowings.
• Stockholders' deficit worsened (became more negative), potentially due to share repurchases exceeding net income and other equity changes.

Capital Allocation

McKesson is focused on capital allocation to drive shareholder value. They returned $3.1 billion to shareholders in the first nine months of FY25, including $2.8 billion in share repurchases and $254 million in dividends. They are raising share repurchase guidance to approximately $3.2 billion for fiscal year 2025. The acquisition of PRISM Vision Holdings for approximately $850 million demonstrates business reinvestment and strategic growth through acquisitions. Management reiterated commitment to growing dividend and value-creating share repurchases and maintaining a strong balance sheet.

Management Commentary

McKesson reported strong third quarter operational results with broad-based Revenue growth of 18% and Adjusted Operating Profit growth of 16%. Our performance reflects the strength and momentum across the enterprise.

Based on our third quarter performance, we are raising and narrowing our guidance range for fiscal 2025 Adjusted Earnings per Diluted Share to $32.55 to $32.95.

We are also pleased to announce the signing of a definitive agreement to acquire a controlling interest in PRISM Vision Holdings, in support of our leadership in community practice management and specialty solutions.

During the quarter, we observed lower than anticipated volumes related to the illness season, which impacted the third quarter results [Medical-Surgical Solutions].

As we previously discussed, each illness season is unique and the timing and severity level of each illness season can drive variability from quarter to quarter. [Medical-Surgical Solutions]

Overall Sentiment: Positive. Management expresses confidence in the company's performance and future outlook, supported by strong Q3 results and raised guidance. They acknowledge headwinds in the Medical-Surgical segment due to a softer illness season but emphasize cost optimization initiatives and strategic growth in other segments, particularly oncology and biopharma services. The acquisition of PRISM Vision Holdings is presented as a significant positive development for future growth.

Recommendation

Rating: Buy

Reason for Rating: Based on strong financial performance, raised guidance, and strategic growth initiatives, a 'Buy' recommendation is warranted.

Disclaimer: This report is for informational purposes only and not investment advice. The analysis is based on limited information and subject to change. Investing in securities involves risks, including potential loss of principal. Past performance doesn't guarantee future results. Always conduct your own research, understand the risks, and consult a financial professional before making investment decisions.

Generated on: 2/6/2025, 6:17:54 AM