McKesson (MCK): Record 59% Earnings Growth Challenges Moderation Narrative

McKesson (MCK) reported earnings growth of 59% over the past year, easily beating its five-year average annual earnings growth rate of 44.6%. Net profit margin improved to 1%, up from 0.8% last year. The company’s earnings are forecast to grow at 11.24% per year, while revenue growth is expected at 7.7% per year. Despite trading below an estimated fair value of $1,352.85 at a current price of $858.61, McKesson boasts high quality earnings and has delivered consistent profit gains. However, future growth is anticipated to be more moderate.

See our full analysis for McKesson.

Next, we will hold these results up to the current market and community narratives to see whether the numbers support, challenge, or change the ongoing story for McKesson.

See what the community is saying about McKesson

Margin Expansion Outpaces Modest Sector Trends

• Net profit margin has risen from 0.8% to 1% over the past year, with analysts expecting it to reach 1.1% within three years. This trajectory modestly outpaces many wholesalers in the healthcare supply sector.
• According to the analysts' consensus view, margin gains are being driven by operational efficiency from digitization and automation investments, such as automated picking and logistics systems.
  • Consensus highlights automated distribution and greater use of analytics as underpinning McKesson’s improved profitability, setting it apart from smaller rivals with less scale and technology leverage.
  • However, consensus also notes regulatory pressure on drug pricing could cap margins longer term, which creates some tension with the current improvement.
• To see how margin strength compares to industry consensus expectations, read the full narrative for McKesson. 📊 Read the full McKesson Consensus Narrative.

Profit Growth Slowing, but Still Robust

• Although McKesson achieved 59% earnings growth last year, this is considerably higher than the five-year annual average of 44.6%. Analysts expect annualized growth to slow to 11.24% going forward.
• The analysts’ consensus narrative points out that recent record profit growth reflects a favorable one-off mix of specialty pharmaceutical expansion and acquisitions. Future performance will hinge more on recurring income streams and deeper customer relationships.
  • Consensus calls attention to new business lines and operational efficiencies supporting near-term results. Yet the anticipated deceleration may challenge aggressive bullish expectations.
  • This shift toward more moderate, sustainable growth is seen as a hallmark of a maturing market leader balancing upside with ongoing competitive and regulatory risks.

Valuation Discount Against Both Peers and DCF

• Despite a Price-to-Earnings Ratio of 26.5x, which is higher than the industry’s 21.5x but lower than the peer average of 28.1x, McKesson’s share price of $858.61 still trades at a roughly 36% discount to its DCF fair value of $1,352.85.
• Consensus narrative acknowledges that the company’s valuation discount is supported by its consistent profit growth and improving margins. However, it warns that slower forecast earnings and elevated PE may temper upside for some investors.
  • Analysts cite share repurchases reducing outstanding shares by about 2% yearly, which could support per-share value if profit growth endures.
  • Still, with future PE ratios forecast to come down toward industry averages, consensus stresses the importance of monitoring whether operating improvements continue offsetting broader market headwinds.

Next Steps

To see how these results tie into long-term growth, risks, and valuation, check out the full range of community narratives for McKesson on Simply Wall St. Add the company to your watchlist or portfolio so you'll be alerted when the story evolves.

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A great starting point for your McKesson research is our analysis highlighting 3 key rewards and 1 important warning sign that could impact your investment decision.

See What Else Is Out There

While McKesson’s historical profit growth is impressive, analysts caution that slowing earnings and a rising Price-to-Earnings Ratio could limit future upside potential.

If you want to avoid overpriced stocks facing moderation in growth, check out these 853 undervalued stocks based on cash flows and discover companies trading below what their cash flows truly support.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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