Raising McKesson FVE to $298 Following European Divestment and COVID-19 Contract Extensions

We are raising our fair value estimate on narrow-moat McKesson to $298 from $235 per share after we did a deeper dive into the industry and adjusted for strong first-quarter performance as well as revised fiscal year guidance. The main change in our outlook pertains to operating expenses involving labor, shipping, and facility costs. In the first quarter, the firm completed a large part of its program to permanently divest of its European distribution business in the international segment. The sale significantly reduced operating expenses as a percentage of sales year over year despite higher revenue. Though revenue was propped up by vaccine and test kit distribution contracts with the U.S. government, these contracts were extended into early- to mid-2023. The extension should smooth out the top-line impact of the European divestitures. A smaller factor in our revision is the relatively high-margin primary care business contributing to an improved sales mix. While we left our gross margin forecast stable, we lowered our five-year forecast for operating costs as a percentage of sales by 30 basis points to accommodate these trends.