McKesson Corporation MCK has been gaining on the back of its robust Biologics business. A solid second-quarter fiscal 2022 performance, along with its strategic deals, is expected to contribute further. However, stiff competition and weaker generic pharmaceutical pricing trends persist.
Over the past year, this Zacks Rank #2 (Buy) stock has gained 43.1% compared with 16.9% growth of the industry and 28.6% rise of the S&P 500 composite.
The renowned health care services and information technology company has a market capitalization of $38 billion. McKesson projects 9% growth for the next five years, in which it expects to maintain its strong performance. The company’s earnings surpassed estimates in all the trailing four quarters, the average earnings surprise being 19.90%.
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Let’s delve deeper.
Strength in Biologics: Investors are optimistic about McKesson’s robust Biologics business. Independent specialty pharmacy, Biologics by McKesson, has been making impressive progress of late. This month, the pharmacy was selected by PharmaEssentia USA Corporation as a specialty pharmacy provider of BESREMi (ropeginterferon alfa-2b-njft) for the treatment of adults with polycythemia vera.
The same month, Biologics by McKesson was selected by Takeda Pharmaceuticals as a specialty pharmacy provider of LIVTENCITYTM (maribavir), indicated for the treatment of adults and pediatric patients (above the age of 12 and weighing at least 35 kg) with post-transplant cytomegalovirus infection or disease that is refractory to treatment (with or without genotypic resistance) with ganciclovir, valganciclovir, cidofovir or foscarnet.
Strategic Deals: McKesson has inked some strategic deals over the past few months, raising investors’ optimism on the stock. The company, in November, inked an agreement to sell off its U.K. businesses to the pan-European asset management group AURELIUS. The agreement is an important step in advancing McKesson’s efforts to streamline its business and fully exit the European region.
In August, McKesson’s oncology and insights business, Ontada, announced a strategic agreement with Merck, which is expected to facilitate the development of real-world research excellence and innovation.
Strong Q2 Results: McKesson’s robust second-quarter fiscal 2022 results buoy optimism. The company recorded strong segmental performances by three of its four segments. A raised earnings outlook for fiscal 2022 instills confidence in the stock. Double-digit adjusted operating profit growth across all segments is encouraging. The company’s crucial role in the COVID-19 response efforts in the United States and abroad have been through the distribution of COVID-19 vaccines, ancillary supply kits and COVID-19 tests is impressive.
Weak Trends: McKesson distributes generic pharmaceuticals, which are subject to price fluctuation. The Distribution Solutions segment had experienced weaker generic pharmaceutical pricing trends, which continue to persist. Continued volatility, unfavorable pricing trends, reimbursement of generic drugs, significant fluctuations in the nature, frequency and magnitude of generic pharmaceutical launches could have a material adverse impact on McKesson.
Stiff Competition: Distribution Solutions faces stiff competition both in terms of price and service from various full-line, short-line and specialty wholesalers, service merchandisers, self-warehousing chains, manufacturers engaged in direct distribution, third-party logistics companies and large-payer organizations. Moreover, the company depends on fewer suppliers for its products. As a result, it is not in a position to negotiate pricing.
McKesson is witnessing a positive estimate revision trend for fiscal 2022. In the past 90 days, the Zacks Consensus Estimate for its earnings has moved 12.4% north to $22.64.
The Zacks Consensus Estimate for the company’s third-quarter fiscal 2022 revenues is pegged at $65.97 billion, suggesting a 5.4% rise from the year-ago quarter’s reported number.
Other Key Picks
A few other top-ranked stocks investors can consider in the broader medical space are Laboratory Corporation of America Holdings LH or LabCorp, Thermo Fisher Scientific Inc. TMO and AMN Healthcare Services AMN.
LabCorp, carrying a Zacks Rank #2, has an estimated long-term growth rate of 10.6%. LH’s earnings surpassed estimates in the trailing four quarters, the average surprise being 25.73%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
LabCorp has gained 53.9% compared with the industry’s 16.9% rise over the past year.
Thermo Fisher has an estimated long-term growth rate of 14%.TMO’s earnings surpassed estimates in the trailing four quarters, the average surprise being 9.02%. It currently carries a Zacks Rank #2.
Thermo Fisher has gained 42.9% compared with the industry’s 11.9% rise over the past year.
AMN Healthcare has an estimated long-term growth rate of 16.2%. AMN’s earnings surpassed estimates in the trailing four quarters, the average surprise being 19.51%. It currently flaunts a Zacks Rank #1.
AMN Healthcare has gained 78.5% against the industry’s 49.9% fall over the past year.
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