Acquisition Of Florida Cancer Specialists And InspiroGene Launch Will Expand Future Oncology Services

Key Takeaways

• Growth in oncology and biopharma services, alongside strategic acquisitions, is poised to drive long-term revenue and earnings growth.
  
• Divestiture of non-core assets and cost optimization efforts enhance financial health, potentially improving margins and profitability.
  
• Political and policy uncertainty, market weaknesses, and venture losses could affect McKesson's revenue, while pending sales in Canada present additional risks.

Catalysts

Provides healthcare services in the United States and internationally.

• McKesson's oncology and biopharma services platforms are experiencing growth driven by consistent patient visits and increased patient enrollment in clinical trials, which should contribute to future revenue expansion and potentially higher earnings.
  
• The launch of InspiroGene and focus on cell and gene therapies will leverage McKesson's capabilities in oncology, potentially increasing revenue and margins through high-value services in a growing therapeutic area.
  
• Strategic acquisitions, such as the controlling interest in Florida Cancer Specialists, will expand McKesson's oncology footprint, likely boosting long-term revenue and contributing to earnings growth as the network scales.
  
• Cost optimization and operational efficiency initiatives in the Medical-Surgical segment are expected to result in significant savings, thereby enhancing net margins and operating profit in the near term.
  
• The announced divestiture of non-core assets (Rexall and Well.ca) in Canada allows McKesson to reinvest proceeds into high-margin, high-growth areas like oncology and biopharma services, potentially increasing future earnings and financial health.

McKesson Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming McKesson's revenue will grow by 9.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.8% today to 1.0% in 3 years time.
• Analysts expect earnings to reach $4.5 billion (and earnings per share of $40.39) by about December 2027, up from $2.5 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $3.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.1x on those 2027 earnings, down from 28.2x today. This future PE is lower than the current PE for the US Healthcare industry at 21.9x.
• Analysts expect the number of shares outstanding to decline by 4.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

McKesson Future Earnings Per Share Growth

Risks

• Political and policy uncertainty related to the 2024 presidential and congressional elections may impact health care policies, which could influence McKesson's future revenue and earnings.
  
• Instances of weakness in the primary care markets and normalization post-COVID have led to slower volumes in Medical-Surgical Solutions, potentially affecting net margins and operating profit growth.
  
• Delays in product launches and program ramp-ups in the Prescription Technology Solutions segment, due to regulatory or customer-specific reasons, could impact revenue growth despite stable operational earnings.
  
• Losses related to ventures, such as those in the McKesson Ventures portfolio, can result in variability in corporate expenses and impact consolidated earnings depending on the performance of individual investments.
  
• The completion of the sale of McKesson’s Canada-based Rexall and Well.ca businesses is pending customary regulatory clearances, representing a risk of non-completion and potential impact on both revenue and earnings from these operations.

Valuation

• The analysts have a consensus price target of $653.95 for McKesson based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $715.0, and the most bearish reporting a price target of just $530.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $436.5 billion, earnings will come to $4.5 billion, and it would be trading on a PE ratio of 19.1x, assuming you use a discount rate of 5.9%.
• Given the current share price of $562.78, the analyst's price target of $653.95 is 13.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.