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Should You Buy, Sell or Hold McKesson (MCK) Before Q1 Earnings?

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McKesson Corporation (MCK - Free Report) is scheduled to report first-quarter fiscal 2025 results on May 7, after market close.

The company delivered a negative earnings surprise of 2.52% in the last reported quarter. Its earnings beat estimates in three of the trailing four quarters and missed once, delivering an average surprise of 8.38%.

MCK’s top line has been gaining primarily on the back of the rapid adoption of GLP-1 weight loss drugs. These drugs have been boosting its sales for the past few quarters. Moreover, rising demand for specialty pharmaceuticals is another key factor behind revenue growth.

Meanwhile, a recovery in primary care visits aided top-line growth during the fourth quarter of fiscal 2024. Moreover, the company’s expansion of its distribution centers and adoption of artificial intelligence (AI) in its services and products have been boosting its revenues in recent times. However, the company’s earnings continue to reflect the higher cost of sales due to increased sales of lower-margin products.

Q1 Estimates

The Zacks Consensus Estimate for earnings is pegged at $7.16 per share, implying a decline of 1.5% year over year. The consensus mark for revenues is pegged at $83.21 billion, indicating a surge of 11.7% year over year.

Factors Likely to Have Driven Q1 Segmental Performance

U.S. Pharmaceutical

McKesson derives the majority of its revenues from the U.S. Pharmaceutical segment, which distributes drugs and other healthcare-related products in the United States. Prescription volume, a key operating metric for this segment, is likely to have shown stable growth like the last reported quarter. Continued robust demand for specialty pharmaceuticals, including cancer therapies, should have been a key driver for prescription volume during the first quarter.

Although we expect GLP-1 medication prescription volume to have grown in the soon-to-be-reported quarter, it is likely to report slower growth due to a higher base for comparison. An inflection in the volume of this medication started in the year-ago quarter, creating a higher base.

The company’s new distribution centers and expansion in Canada are likely to have acted as tailwinds during the quarter. However, the divestiture of its European business is anticipated to have led to a loss of sales.

However, branded-to-generic conversions might have weighed on its performance. The lower margin for GLP-1 medications might have continued to hurt the gross margin during the first quarter.

Our estimate for this segment’s revenues is pegged at $74.84 billion, indicating an improvement of 11.4% from the prior-year quarter’s 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.

Revenues in this segment are likely to have shown strong demand for technology services. Meanwhile, the trend of increased demand for access solutions, led by newly launched products, is also expected to have continued during the first quarter. However, higher investments and expenses to support future growth across the biopharma services platform are likely to have hurt segmental income during the period.

Our top-line estimate for the Prescription Technology Solutions segment is pegged at $1.47 billion, implying an 18% 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 reported quarter. The trend is likely to have continued in the first quarter.

Although recovery in care visits looks promising, the patient volume might have acted as a headwind. The segmental result will also reflect the decline in lower contributions from the U.S. government's COVID-19 vaccine program.

Our top-line estimate for the Medical Surgical Solutions segment is pegged at $2.73 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 first quarter. Meanwhile, interest expenses followed multiple rate hikes over the past couple of years, which must have hurt the bottom line.

McKesson Corporation Price and EPS Surprise

McKesson Corporation Price and EPS Surprise

McKesson Corporation price-eps-surprise | McKesson Corporation Quote

Earnings Beat Likely

Our proven model predicts an earnings beat for McKesson this time around. 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.

Earnings ESP: MCK has an Earnings ESP of +0.04%. 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 drug distributor in the United States, known for its extensive distribution network and services that support both healthcare providers and patients. Its focus on innovation has been a significant driver of its performance over the past several years. The company is committed to enhancing efficiency through investments in automation and technology, which are expected to be key growth drivers in the future.

Earlier this year, McKesson expanded its distribution network by adding two new centers equipped with advanced technology in the United States. This expansion is expected to improve the efficiency of drug distribution, particularly for specialty pharmaceuticals. The company has also developed a unique set of assets to serve the growing Oncology and Biopharma markets. Additionally, its multi-year plan to modernize distribution centers across Canada looks promising for revenue growth.

McKesson's network includes more than 50,000 pharmacies and approximately 900,000 providers, making it one of the most important drug distributors with access to a large patient population. This scale positions the company to attract more pharmaceutical manufacturers, thereby driving revenue growth.

In addition, McKesson is adopting cutting-edge technology, particularly AI, to support its customers. The AI-driven tools are being integrated to assist healthcare providers with revenue cycle management and the evaluation of clinical solutions. These AI services should also help providers navigate complex insurance coverage and reimbursement processes more efficiently. The company also plans to use AI for automatic clinical note generation and various supply-chain applications.

Our Take

MCK’s shares have risen 36.5% year to date compared with the industry’s growth of 3.6%. The outperformance can be attributed to top and bottom-line improvements on the back of promising initiatives taken by the company.

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: A). However, the pace will likely be modest (Momentum Score: C).

Although the Zacks Rank, coupled with the style score for MCK, indicates that the company may beat on earnings this reporting cycle and perform well going forward, we caution against any new investment bet in MCK at present. However, investors may continue to hold the stock in their portfolio.

Zacks Investment Research
Image Source: Zacks Investment Research

Other Stocks to Consider

Here are a few other medical stocks worth considering, as these have the right combination of elements to come up with an earnings beat this reporting cycle.

Phibro Animal Health (PAHC - Free Report) has an Earnings ESP of +0.99% and a Zacks Rank of 2 at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

The stock has risen 59.5% year to date. PAHC’s earnings beat estimates in the last reported quarter. It has a trailing four-quarter average negative earnings surprise of 2.30%.

Owens & Minor (OMI - Free Report) has an Earnings ESP of +1.54% and a Zacks Rank of 2 at present.

The stock fell 14.6% year to date. OMI’s earnings beat estimates in the last reported quarter. It has a trailing four-quarter average earnings surprise of 11.99%.

ResMed (RMD - Free Report) has an Earnings ESP of +2.85% and a Zacks Rank of 3 at present.

The stock has risen 16% year to date. RMD’s earnings beat estimates in the last reported quarter. It has a trailing four-quarter average earnings surprise of 2.81%.

Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.

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