Business

McKesson stock and its peers profit from a scary market


It’s been a tough year for Wall Street. But several industry factors have freed the three major drug distributors — Cardinal Health, AmerisourceBergen and McKesson — to post some of the market’s best gains so far in 2022. That lifted its shares. McKesson and other distributors.




X



Resolutions in February on a number of regulatory issues related to the opioid epidemic provided a positive basis for stockpiles. On a more fundamental level, Jefferies analyst Brian Tanquilut says, McKesson (MCK), AmerisourceBergen (ABC) and cardinal health (CAH) are cash flow generators. Their revenue streams are tied to businesses that are primarily recession-proof. In addition, each company is promoting new business areas such as biosimilars, oncology, genetics and family health.

“I would say the number one reason is that these stocks are generally considered less speculative,” Tanquilut said in an interview. “When people were worried about inflation coming, the group performed better.”

Since the beginning of the year, the Wholesale Medicine/Medical Supplier industry group consisting of seven companies has increased by more than 33%. That grouping strength partly reflects the companies’ strong balance sheets and stock buybacks. Cardinal Health has been in stiff competition with McKesson shares, both of which are up more than 53%. AmerisourceBergen Securities led the way with a 29% gain.

McKesson stock: Distributor with the largest capitalization

McKesson, AmerisourceBergen and Cardinal Health are top three pharmaceutical distributors in the US, according to a 2019 report from consulting firm Deloitte. Various estimates suggest that they control more than 90% of the market in the US. Some estimates put their market share closer to 95%.

These companies are intermediaries. They buy drugs, medical equipment and supplies at wholesale prices and distribute them to pharmacies, hospitals, and doctors’ offices. McKesson has close ties to the pandemic as the sole distributor of Covid vaccines from modern (mRNA) and Johnson & Johnson (JNJ). The company also sends Covid tests. AmerisourceBergen distributes Covid treatments.

McKesson is the big dog of the corporation, with a market capitalization of $54.2 billion. AmerisourceBergen’s market capitalization is $34.1 billion, compared with Cardinal’s $20.8 billion.

In the September quarter, McKesson nearly fell short of revenue expectations at $70.16 billion. But McKesson’s stock ended up rising 2% the next day after raising its forecast for the year, in part because demand for Covid shots continued – albeit slowly -. McKesson’s revenue grew 5%.

On the other hand, AmerisourceBergen and Cardinal Health topped expectations with revenue of $61.17 billion and $49.6 billion, respectively. AmerisourceBergen’s revenue increased 4% while Cardinal’s revenue increased 13%. Both companies also beat the earnings point of view.

Eric Coldwell, an analyst with Baird Equity Research, noted that McKesson and AmerisourceBergen are likely to see continued declines in their Covid businesses. But that is expected. He rates AmerisourceBergen and McKesson shares as overweight and a neutral rating on Cardinal shares.

“AmerisourceBergen is currently adjusting from very strong US earnings growth. McKesson is holding steady and lagging chronically. Cardinal Health is seeing steady earnings growth in the US for the first time. first in about five years,” Coldwell said in a September report.

Exceptional performance in the broader market landscape

So what drives outstanding performance?

After years of uncertainty, three companies have benefited from recent clarity around opioid epidemic and countless lawsuits. In February, they agreed to pay $21 billion over 18 years to settle claims related to their role in the crisis. Johnson & Johnson is on track to make $5 billion.

Coldwell said the opioid litigation ended “with a bow.” He acknowledged that there is still a chance of lawsuits during the year, “but the magnitude of the exposure is definitely verifiable.” Jefferies Tanquilut said the deal acts as a clearinghouse, removing risk on the stock of McKesson and its team.

In addition, the companies are all reporting strength to their core business, drug distribution. In the most recent quarter, McKesson’s US pharmaceutical business grew 12%, AmerisourceBergen reported a 5% increase in US healthcare solutions, and Cardinal’s pharmaceutical business grew. 15%.

JPMorgan analyst Lisa Gill said growth was particularly strong in the US.

“We remain optimistic about the group as a whole, believing core performance remains strong, and while pressures remain in the near term, we see them easing in the near term,” she said in a November report. coming quarters”.

Pressure still faces rival McKesson stock

Among those pressures, Gill noted that generics face deflation. That means less money for manufacturers and distributors. What’s more, Baird analyst Coldwell said, the Inflation Reduction Act could have an impact on lowering brand-name drug prices.

There are also company-specific challenges, including an active investor driving a strategic review at Cardinal Health. Meanwhile, Cardinal Health’s medical supplies distribution business continued to struggle. The company had an improvement plan, but medical sales were still down 9% in the first fiscal quarter of 2023. Furthermore, Walgreens Shoe Alliance (WBA) recently sold 2 billion dollars shares of ABC.

McKesson is also in the process of streamlining its business by arranging an exit from Europe. Its operations in Canada remain intact.

McKesson CEO Brian Tyler remains upbeat about the company’s recent earnings call. He noted that the economic environment is still changing and that McKesson is facing cost inflation as well as some supply chain disruptions.

However, “demand for healthcare has proven to be quite stable and largely affected,” he said. “And I’d say this is similar to what we’ve seen in previous economic cycles.”

Stocks are appreciated

Big Three distributors trade in the top 6% of all stocks on 12-month performance.

McKesson stock has strength Relative Strength Rating out of 95 out of 99 best possible, according to Digital IBD. This means the stock ranks in the top 5% of all stocks. Cardinal Health is a few places higher with an RS Rating of 97. AmerisourceBergen is behind with an RS Rating of 94.

Analysts are closely monitoring the companies’ efforts in the specialty pharmaceutical sector. Biotechnology is rapidly paving the way for new drugs that exploit the immune system and genetics. The three biggest distributors are right next to them.


Fed’s key inflation rate falls as Powell changes target; Dow Jones index


McKesson called on strength from the specialty and oncology businesses on the quarterly call while AmerisourceBergen talked about its efforts in cell and gene therapies. Cardinal Health says it is focusing in part on biosimilars. Biosimilars are lower-cost versions of biologic drugs. These drugs tend to be more expensive than small molecule drugs like pills and therefore more lucrative for companies.

“Specialty drugs play a role in future pharmaceutical innovation,” AmerisourceBergen CEO Steven Collis said during the company’s recent earnings call. “And with our continued innovation and investment, we have further strengthened our leadership to capture this growth opportunity.”

AmerisourceBergen, McKesson Stock Breaks Out

All in all, even after strong gains over the past year, the outlook remains bright for drug distributors, Baird’s Coldwell said.

McKesson stock recently broke out of a flat sole with one buy points at 375.33, MarketSmith.com Shows. Broad macro worries and big swings in the healthcare sector sent stocks down more than 7%-8% from entry, signaling investors should short stop loss. But McKesson stock is now back above support at the 10-week moving average and is up again.

AmerisourceBergen stock broke out from a cup-with-handle pattern in late November. Shares are in a buy range above entry 167.39. Cardinal Health stock avoided a severe drop and stayed above cup with handle buy point at 71.22.

Coldwell calls pharmaceutical distributors “one of the few safe harbors in a stormy world.”

“If you need a short-term parking spot, distributors will easily fit that bill,” he said. “But we are advocating a long-term investment based on a solid mosaic that has been built up over the years.”

Follow Allison Gatlin on Twitter at @IBD_AGatlin.

YOU MIGHT ALSO LIKE:

Biotech stocks head for neuroscience renaissance with Biogen, Amylyx at the helm

CRISPR Stock: Will Risk Concerns Suppress Gene Editing Cures?

See IBD investment strategies for actionable market insights

How to Research Growth Stocks: Why This IBD Tool Simplifies Finding Top Stocks

Profit from short-term trends with SwingTrader

news7f

News7F: Update the world's latest breaking news online of the day, breaking news, politics, society today, international mainstream news .Updated news 24/7: Entertainment, Sports...at the World everyday world. Hot news, images, video clips that are updated quickly and reliably

Related Articles

Back to top button