McKesson Earnings: Soft Sales Offset by Improved Margins and EPS Beat; Shares Still Expensive

Narrow-moat McKesson reported mixed first-quarter earnings and started the fiscal year on a soft note. After adjusting our model and accounting for time value of money, we raise our fair value estimate to $490 per share from $460. Total sales were up 6.4% year over year to $79.3 billion, slightly missing our assumption of high-single-digit growth. The US distribution business, which grew 6.8%, was driven by increasing prescription volume and growing adoption GLP-1s (diabetes and obesity drugs). GLP-1 sales of $8.8 billion during the quarter made up about 12% of segment sales and accounted for 40% of segment growth. McKesson also noted that onboarding of UnitedHealth's OptumRx was successful, with neither operational hiccups nor material related costs during the transition. This being said, today's number looked weak compared with double-digit growth all of last year, and we attribute this to ongoing, but improving, supply issues for GLP-1s and lower volumes of Humira. Humira went generic last year and saw a significant volume decline this year due to formulary changes among McKesson's key customers. These factors, coupled with challenges in prescription technology and soft demand for medical-surgical solutions, led to a slight downward revision in sales expectations for the year.