Introduction
McKesson Corporation (NYSE:MCK) missed Q3 2017 numbers and this marks the fifth consecutive quarter in which McKesson has missed its revenue targets. The stock sold off shapely as a result of its recent revenue miss, sliding 8.3% or $12.55 per share. McKesson has paid dearly for this string of revenue misses, shedding over $102 per share or 42.5% from its all-time highs in May of 2015 falling from $240 to roughly $138 as of recent trading (Figure 1). There’s been a tremendous amount of pressure regarding the pharmaceutical supply chain in terms of pricing competition and potential erosion of the pharmaceutical wholesaler model. As if this wasn’t enough, social and political pressures over drug pricing have exacerbated these issues to the point of fierce pricing competition and the slowing of drug price increases (negatively impacting McKesson’s ability to take larger dollar amount cuts from the volume of business). As the negative sentiment is priced into the stock and acquisitions starting to bear fruit, will this finally be the turning point?
Figure 1 – Google Finance graph depicting McKesson’s sustained sell-off throughout the back-half of 2015 and throughout 2016 with a pronounced sell-off after Q3 2017 earnings.
McKesson Now Trades At 2013 Levels
McKesson hasn’t traded at current levels since October of 2013 or over three years ago. This sell-off was justified as McKesson has missed revenue targets for 5 consecutive quarters. In addition to the missed revenue targets, McKesson was faced with an increasingly challenging healthcare landscape as political posturing, drug pricing scrutiny, overall negative sentiment towards pharmaceutical companies due to price gouging allegations and the overall rotation out of healthcare related stocks. McKesson was faced with drug pricing concerns along with the negative social and political backdrop. McKesson along with other pharmaceutical distribution companies have been under tremendous pressure as of late due to political pressures regarding the pharmaceutical supply chain and drug pricing concerns. The middleman portion of the pharmaceutical drug supply chain model is slowly shifting away from the traditional means of delivering drugs to hospitals and pharmacies in a more economically-friendly manner. More often than ever hospitals and pharmacies are establishing direct relationships with manufacturers thus buying direct such as the recent CVS deal to supply the generic EpiPens. Manufacturers have increased their use of direct accounts thus disrupting the traditional distribution model long dominated by companies such as McKesson. This action hits distributors particularly hard since they make their money by moving product within the supply chain where 98% of McKesson’s revenue comes from this distribution space.
After last quarter McKesson stated that competition and a slowdown in price inflation for brand-name drugs would reduce its profits. McKesson said it has been forced to lower the prices it charges to independently owned pharmacies to match the prices charged by competing wholesalers looking to gain market share. “We have made a very significant change in our pricing practice to match where the market is today,” McKesson CEO. McKesson contracts with manufacturers to distribute drugs to customers including retail pharmacies and hospitals. A slowdown in price increases is beginning to hurt its profit margins however these issues appear to be reflected in its stock price now.
A Buying Opportunity Has Now Presented Itself
Despite these issues, McKesson has made a series of acquisitions and partnerships over the last two years to position itself for future growth. Albeit concerns regarding the traditional distribution model are being challenged and pricing competition has taken hold in the space, McKesson has been highly acquisitive, growing dividends over time and buying back its shares to drive shareholder value. Despite its major acquisitions and partnerships (UDG Healthcare plc, Sainsbury's pharmacies, Vantage Oncology, Biologics, Rexall Health, Albertsons, Wal-Mart and CoverMyMeds) in an effort to position itself for growth, these efforts have been overcome by drug pricing concerns, political backdrop, middleman pressures, pricing competition and declining revenues. McKesson appears very attractive considering its EPS growth, dividend payout, acquisitive mindset and share buyback program. All of these issues have ostensibly been priced into the stock now and with the stock trading at 2013 levels I feel McKesson is a buy. Recent consensus equity rating by Thomson Reuters gives McKesson a 9.1 out of 10 while S&P Capital IQ rates McKesson as undervalued (99/100 undervalued), high quality (100/100), healthy financial standing (99/100) and growth stability of 60/100 (Figures 2 and 3).
Figure 2 – Consensus equity rating by Thomson Reuters
Figure 3 – S&P Capital IQ ratings for McKesson
Conclusion
McKesson Corporation (NYSE:MCK) hasn’t traded at current levels since October of 2013. This sell-off was justified as McKesson has missed revenue targets for 5 consecutive quarters. In addition to the missed revenue targets, McKesson was faced with an increasingly challenging healthcare landscape as political posturing, drug pricing scrutiny, overall negative sentiment towards pharmaceutical companies due to price gouging allegations and the overall rotation out of healthcare related stocks. Despite these issues, McKesson has made a series of acquisitions and partnerships to position itself for future growth. McKesson has been highly acquisitive, growing dividends over time and buying back its shares to drive shareholder value. Its major acquisitions and partnerships (UDG Healthcare plc, Sainsbury's pharmacies, Vantage Oncology, Biologics, Rexall Health, Albertsons, Wal-Mart and CoverMyMeds) were made in an effort to position itself for growth and diversification. As these collective measures stabilize revenues and potentially reaccelerate growth then this stock could be poised for a rebound over the intermediate term.
Noah Kiedrowski
INO.com Contributor - Biotech
Disclosure: The author does not hold shares of McKesson and is currently on his watch list with a potential $138 entry point. The author has no business relationship with any companies mentioned in this article. He is not a professional financial advisor or tax professional. This article reflects his own opinions. This article is not intended to be a recommendation to buy or sell any stock or ETF mentioned. Kiedrowski is an individual investor who analyzes investment strategies and disseminates analyses. Kiedrowski encourages all investors to conduct their own research and due diligence prior to investing. Please feel free to comment and provide feedback, the author values all responses.
