McKesson (MCK)

Healthcare distributor and services company McKesson (NYSE:MCK) missed Wall Street’s revenue expectations in Q1 CY2025, but sales rose 18.9% year on year to $90.82 billion. Its non-GAAP profit of $10.12 per share was 3% above analysts’ consensus estimates.

Company Overview

With roots dating back to 1833, making it one of America's oldest continuously operating businesses, McKesson (NYSE:MCK) is a healthcare services company that distributes pharmaceuticals, medical supplies, and provides technology solutions to pharmacies, hospitals, and healthcare providers.

Healthcare distributors operate scale-driven business models that thrive on high volumes. Their recurring revenue streams from contracts with hospitals, pharmacies, and healthcare providers provide stability, but profitability can be squeezed by powerful stakeholders on both sides (suppliers and customers), pricing pressures, and regulatory changes. Looking ahead, the sector is positioned for growth due to increasing demand for healthcare services driven by an aging population and advancements in medical technology. However, rising operational costs, potential drug pricing reforms, and supply chain vulnerabilities present potential headwinds. Additionally, the push for digitalization and value-based care creates opportunities for innovation but requires significant investment to remain competitive.

McKesson's primary competitors in healthcare distribution include AmerisourceBergen (NYSE:ABC) and Cardinal Health (NYSE:CAH), which together with McKesson form the "Big Three" pharmaceutical distributors in the United States. In its technology and services segments, McKesson competes with companies like Cerner (now part of Oracle, NYSE:ORCL), Change Healthcare (acquired by UnitedHealth Group, NYSE:UNH), and various specialized healthcare technology providers.

Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.

With $359.1 billion in revenue over the past 12 months, McKesson is one of the most scaled enterprises in healthcare. This is particularly important because healthcare distribution & related services companies are volume-driven businesses due to their low margins.

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Thankfully, McKesson’s 9.2% annualized revenue growth over the last five years was decent. Its growth was slightly above the average healthcare company and shows its offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within healthcare, a half-decade historical view may miss recent innovations or disruptive industry trends. McKesson’s annualized revenue growth of 13.9% over the last two years is above its five-year trend, suggesting its demand recently accelerated.

We can dig further into the company’s revenue dynamics by analyzing its most important segment, U.S. Pharmaceutical . Over the last two years, McKesson’s U.S. Pharmaceutical revenue averaged 16.7% year-on-year growth.

This quarter, McKesson’s revenue grew by 18.9% year on year to $90.82 billion but fell short of Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 12.2% over the next 12 months, a slight deceleration versus the last two years. We still think its growth trajectory is attractive given its scale and suggests the market is baking in success for its products and services.

McKesson was roughly breakeven when averaging the last five years of quarterly operating profits, lousy for a healthcare business.

On the plus side, McKesson’s operating margin rose by 3.3 percentage points over the last five years, as its sales growth gave it operating leverage. This performance was mostly driven by its past improvements as the company’s margin was relatively unchanged on two-year basis.

In Q1, McKesson generated an operating profit margin of 1.8%, in line with the same quarter last year. This indicates the company’s overall cost structure has been relatively stable.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

McKesson’s EPS grew at an astounding 17.2% compounded annual growth rate over the last five years, higher than its 9.2% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

We can take a deeper look into McKesson’s earnings quality to better understand the drivers of its performance. As we mentioned earlier, McKesson’s operating margin was flat this quarter but expanded by 3.3 percentage points over the last five years. On top of that, its share count shrank by 27.6%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

In Q1, McKesson reported EPS at $10.12, up from $6.18 in the same quarter last year. This print beat analysts’ estimates by 3%. Over the next 12 months, Wall Street expects McKesson’s full-year EPS of $33.10 to grow 11.2%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

McKesson has shown mediocre cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 1.5%, subpar for a healthcare business.

Taking a step back, we can see that McKesson failed to improve its margin during that time. Its unexciting margin and trend likely have shareholders hoping for a change.

McKesson’s free cash flow clocked in at $7.47 billion in Q1, equivalent to a 8.2% margin. This result was good as its margin was 3.1 percentage points higher than in the same quarter last year. Its cash profitability was also above its five-year level, and we hope the company can build on this trend.

Companies with more cash than debt have lower bankruptcy risk.

McKesson is a profitable, well-capitalized company with $5.69 billion of cash and $5.65 billion of debt on its balance sheet. This $37 million net cash position gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

It was good to see McKesson narrowly top analysts’ full-year EPS guidance expectations this quarter. We were also happy its EPS outperformed Wall Street’s estimates. On the other hand, its revenue missed significantly. Overall, this was a weaker quarter. The stock remained flat at $690.25 immediately after reporting.

Updated: May 22, 2025 at 11:53 PM EDT

When considering an investment in McKesson, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

There are several reasons why we think McKesson is a great business. To begin with, its revenue growth was decent over the last five years, and its growth over the next 12 months is expected to accelerate. And while its operating margins are low compared to other healthcare companies, its scale makes it a trusted partner with negotiating leverage. Additionally, McKesson’s astounding EPS growth over the last five years shows its profits are trickling down to shareholders.

McKesson’s P/E ratio based on the next 12 months is 19.3x. Scanning the healthcare space today, McKesson’s fundamentals really stand out, and we like it at this price.

Wall Street analysts have a consensus one-year price target of $748.84 on the company (compared to the current share price of $710.64), implying they see 5.4% upside in buying McKesson in the short term.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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