Narrow-Moat McKesson Reports Solid Third-Quarter Earnings; FVE Remains $348

Narrow-moat McKesson reported third-quarter earnings today that were in line with our expectations. We maintain our fair value estimate of $348 per share. Top line for the quarter was up 2.7% year over year, driven by U.S. pharmaceutical (up 12.5%) and prescription technology solutions (up 8.7%). U.S. pharmaceutical sales were bolstered by increased volume of specialty products, which usually comes at a higher cost compared with generic and branded drugs, as well as higher volume from retail accounts. Increased prescription volumes also flowed nicely into the prescription technology solutions segment as it drove higher growth for pharmacy technology services. McKesson’s other two segments saw continued weak performance, as medical-surgical solutions and international were down for the quarter 3.1% and 53.0%, respectively. Strong contributions from COVID-19 vaccines and tests in 2021 resulted in tough comparisons for medical-surgical, and we expect lower sales from both items in the future. The international segment suffered as McKesson continued its European divestitures and experienced currency headwinds. Over the long term, we expect the company’s international business to stabilize and post a normalized level of growth (low- to mid-single-digit).