PRISM Vision Acquisition Will Expand Specialty Services In Retina And Ophthalmology

Key Takeaways

• Acquisitions and investments in specialty services and oncology are expected to drive revenue growth and enhance McKesson's capabilities and margins.
  
• Strategic cost optimization and modernization efforts are anticipated to improve operational efficiency, supporting revenue growth and maintaining stable expenses.
  
• Regulatory challenges, reduced volume, and slow recovery in key segments could hinder revenue growth and operational efficiency, impacting earnings forecasts and margins.

Catalysts

Provides healthcare services in the United States and internationally.

• The acquisition of PRISM Vision is expected to enhance McKesson's specialty services platform and capabilities, particularly in the retina and ophthalmology sector, contributing to future revenue growth and earnings accretion.
  
• Investments in the oncology and biopharma services platforms are seen as strategic growth pillars for McKesson, with expansions supporting revenue growth in specialty pharmaceutical distribution and value-added services that improve margins.
  
• The Prescription Technology Solutions segment is anticipated to see continued revenue growth driven by strong demand for access and affordability solutions, potentially enhancing net margins through increased efficiencies and expanded service offerings.
  
• Strategic cost optimization initiatives in the Medical-Surgical Solutions segment are projected to deliver significant operational efficiencies, potentially leading to improved net margins and operating profit growth.
  
• Investments in expanding and modernizing North American distribution capabilities, including automation and technology, are expected to enhance operational efficiency and support revenue growth while maintaining stable operating expenses.

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 $4.7 billion (and earnings per share of $41.89) by about April 2028, up from $2.8 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.4x on those 2028 earnings, down from 29.9x today. This future PE is lower than the current PE for the US Healthcare industry at 24.1x.
• Analysts expect the number of shares outstanding to decline by 3.58% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

McKesson Future Earnings Per Share Growth

Risks

• The lower-than-anticipated volume in the Medical-Surgical segment due to a softer illness season poses a risk to revenue and operating profit, as this could lead to variability and a potential downturn in future earnings if similar trends continue.
  
• The third quarter saw an expected decline in distribution volumes of COVID-19 vaccines compared to the prior year, which might continue to impact net margins adversely if pandemic-related revenues diminish without sufficient offsetting growth.
  
• The potential regulatory challenges or delays in closing the acquisition of a controlling interest in PRISM Vision could impede projected revenue and EPS accretion, affecting earnings and growth forecasts.
  
• The anticipated decline of certain brand volumes due to formulary changes could lead to reduced revenue in pharmaceutical distribution, particularly if similar formulary changes continue or expand to other products.
  
• A continued slow recovery in the primary care channel, as observed, could further affect demand for seasonal vaccines and medical supplies, leading to stagnation in revenue growth and reduced operational efficiency in the Medical-Surgical segment.

Valuation

• The analysts have a consensus price target of $672.513 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 $732.0, and the most bearish reporting a price target of just $550.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $455.9 billion, earnings will come to $4.7 billion, and it would be trading on a PE ratio of 19.4x, assuming you use a discount rate of 6.2%.
• Given the current share price of $673.69, the analyst price target of $672.51 is 0.2% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.