MCK Financial Analysis

Analysis Date: 2/6/2025

Business Model

McKesson Corporation operates as a diversified healthcare services leader. It generates revenue through four main segments: 1. U.S. Pharmaceutical: Distribution of branded, generic, specialty, biosimilar, and over-the-counter pharmaceuticals and other healthcare-related products. 2. Prescription Technology Solutions (RxTS): Offers access, affordability and adherence solutions, includingCoverMyMeds and RelayHealth. 3. Medical-Surgical Solutions: Provides medical-surgical supplies, equipment, and logistics services to healthcare providers in various settings. 4. International: Pharmaceutical distribution and services primarily in Canada and Norway (as of Q3 2025). Revenue growth is primarily driven by increased prescription volumes, especially in the U.S. Pharmaceutical segment, including higher volumes from retail national account customers and specialty products, and growth in the oncology platform. Growth in RxTS is driven by increased prescription volumes in third-party logistics and technology services businesses. International segment revenue is driven by higher pharmaceutical distribution volumes in the Canadian business.

Revenue Sources

• U.S. Pharmaceutical segment: Distribution of pharmaceuticals and healthcare products to retail chains, independent retail pharmacies, health systems, and specialty providers.
• Prescription Technology Solutions segment: Revenue from access and affordability solutions, third-party logistics, and technology services.
• Medical-Surgical Solutions segment: Sales of medical-surgical supplies and equipment to healthcare providers, impacted by illness season and primary care channel demand.
• International segment: Pharmaceutical distribution in Canada and Norway.

Income Statement Analysis

• Revenue increased by 18% year-over-year, driven by growth in the U.S. Pharmaceutical segment due to increased prescription volumes, including higher volumes from retail national account customers and specialty products, and growth in the oncology platform. (+ Pro)
• Gross Profit increased by 4%, slower than revenue growth, indicating a slight decrease in gross margin. (- Con)
• Selling, distribution, general, and administrative expenses decreased by 19%, significantly contributing to operating income growth. (+ Pro - Efficiency gains)
• Operating Income increased significantly by 91% year-over-year, driven by revenue growth and expense management. (+ Pro)
• Net income attributable to McKesson Corporation increased by 49% year-over-year, reflecting strong profitability. (+ Pro)

Balance Sheet Analysis

• Cash and cash equivalents decreased significantly by 75%, which is a concern, but may be due to timing issues as mentioned in earnings call and cash flow statement. (- Con - Cash Decrease, but potentially timing related)
• Receivables increased by 19.5% and Inventories increased by 12.8%, which are in line with revenue growth, suggesting efficient working capital management. (Neutral - Growth related)
• Short-term borrowing increased to $2.4B from zero, and current portion of long-term debt also increased significantly, indicating increased short-term debt. (+/- Con - Increased Short-term Debt)
• Long-term debt decreased by 20.7%, partially offsetting the increase in short-term debt. (+/- Neutral - Debt Mix Change)
• Retained earnings increased by 11.8%, reflecting profitability. (+ Pro - Retained Earnings Growth)
• Treasury shares at cost increased by 12.5%, indicating continued share repurchase activity. (+ Pro - Share Repurchase)
• Total McKesson Corporation stockholders’ deficit decreased significantly by 56.5%, mainly due to increase in retained earnings and treasury shares. (+ Pro - Deficit Reduction)

Capital Allocation

McKesson's capital allocation strategy focuses on: Dividends: McKesson pays regular and increasing dividends, as evidenced by a 15% increase in dividends declared per common share in Q3 and YTD FY25. Share Repurchases: McKesson actively repurchases its shares, returning significant capital to shareholders. $2.8 billion in share repurchases YTD FY25, and plans for approximately $3.2 billion in share repurchases for the full fiscal year 2025. This is further shown by increase in treasury shares in balance sheet. Business Reinvestment: McKesson reinvests in its business through capital expenditures, including investments in distribution centers, technology, data, and analytics, and strategic acquisitions. Capex for first nine months is $581 million. Recent acquisition of PRISM Vision Holdings demonstrates strategic reinvestment in growth areas like specialty services and ophthalmology. The company prioritizes maintaining a strong balance sheet and stable credit ratings while deploying capital for growth and shareholder returns.

Management Commentary

McKesson reported strong third quarter operational results with broad-based Revenue growth of 18% and Adjusted Operating Profit growth of 16%.

Raising and narrowing Fiscal 2025 Adjusted Earnings per Diluted Share outlook to $32.55 to $32.95 from $32.40 to $33.00.

Signed a definitive agreement to acquire a controlling interest in PRISM Vision Holdings, LLC, in support of our leadership in community practice management and specialty solutions.

Medical Surgical segment growth was lower than anticipated, primarily driven by the late start of a softer illness season.

Through the fiscal third quarter, this illness season had lower severity levels compared to prior years and lower than our expectations, impacting foot traffic in the primary care settings that we serve.

We remain committed to exit and fully divest our European business. Norway remains the only operating country in Europe that we've not entered into an agreement to sell.

Overall Sentiment: Positive. Management is optimistic about the company's performance, highlighting strong revenue and profit growth, and raising full-year guidance. They acknowledge challenges in the Medical-Surgical segment due to a softer illness season but emphasize cost optimization initiatives and confidence in the long-term strategy. The acquisition of PRISM Vision is presented as a strategic positive step. Overall sentiment leans towards positive and confident.

Recommendation

Rating: Hold

Reason for Rating: Hold recommendation based on a balanced view of strong financial performance and some concerns.

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, 6:18:56 AM