McKesson Corporation MCK is well poised for growth backed by strong segmental performances and solid prospects in the pharmaceutical and medical supplies distribution market. However, escalating pricing pressure remains a concern.
Shares of McKesson have gained 21.9%, against the industry’s decline of 7.6% over the past year. Meanwhile, the S&P 500 Index’s rallied 15.1% over the same timeframe.
The company, with a market capitalization of $27.62 billion, is a provider of health care services and information technology. It anticipates earnings to improve 7% in the next five years. Moreover, it has delivered a positive earnings surprise of 4.2% on average in the trailing four quarters.
Let’s delve deeper and analyze the factors that substantiate why it is alright to hold on to the Zacks Rank #3 (Hold) stock for now.
What’s Deterring the Stock?
Rising pricing pressure continues to raise concern for McKesson. The company reaffirmed fiscal 2020 guidance of branded inflation in the mid-single digits. Further, the company continues to face intense competition for selling generic pharmaceuticals in the United States.
Factors to Bolster McKesson
Being a major player in the pharmaceutical and medical supplies distribution market, McKesson has been benefiting from its position over a considerable period of time. The Distribution Solutions segment caters to a wide range of customers and businesses and stands to gain from increased generic utilization, inflation in generics driven by several patent expirations in the next few years, and an aging population.
Notably, the company announced a multi-year strategic growth initiative update that is currently expected to generate approximately $400-$500 (up from the previously guided range of $300-$400 million) million in annual pre-tax gross savings. This will be substantially realized by the end of fiscal 2021.
McKesson continues to gain from acquisitions and strategic collaborations, which in turn will drive the company’s growth while contributing substantially to the top line.
Management aims to increase efficiency, accelerate execution and improve long-term performance through initiatives that consist of multiple growth pillars. The company is anticipated to drive increased efficiency and productivity, on the back of strong business strategies.
McKesson Canada plays a pivotal role in providing solutions to manufacturers, pharmacies and hospitals which cater to patient needs in Canada every day. In the fiscal second quarter, the company witnessed growth in Canadian operations.
Notably, a strong fiscal 2020 adjusted earnings outlook is an added positive.
Which Way Are Estimates Headed?
For fiscal 2020, the Zacks Consensus Estimate for revenues is pegged at $228.22 billion, indicating an improvement of 6.5% from the year-ago period. For adjusted earnings per share, the same stands at $14.39, suggesting growth of 6% from the year-ago reported figure.
Stocks to Consider
Some better-ranked stocks from the broader medical space are Conmed Corporation CNMD, Cardinal Health, Inc CAH and DENTSPLY SIRONA Inc XRAY, each currently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Conmed has a long-term earnings growth rate of 17%.
Cardinal Health has a long-term earnings growth rate of 6.2%.
DENTSPLY SIRONA has a long-term earnings growth rate of 11.6%.
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