It has been well documented that companies maintaining continued success in public procurement, also enjoy more predictability in their cash flow, and are generally more financially stable in insecure times. As discovered in our 'Government Receivables as a Stock Market Signal' white paper, winning government contracts is also likely to have a positive impact on a company’s stock price.
Therefore, we thought it would benefit our readers if we offered them detailed analyses of the financial results these major government contractors achieve.
It is now time for us to look again at a company we covered previously in this series. McKesson recently reported its Q1 fiscal 2024 results and below we will provide a brief analysis of the company’s performance.
Key points:
* 11% Y/Y revenue growth in Q1 of fiscal 2024. Full year sales outlook boosted to +9.5%.
* Adjusted EPS of $7.27/share in Q1, up 25% Y/Y. Full year expectations increased to $26.55-27.35/share, +3.9% relative to 2023.
* U.S Pharmaceutical and Prescription Technology Solutions were the two segments that achieved the highest results in the quarter, helping boost top-line and bottom-line guidance.
* Medical-Surgical Solutions and the International segment were impacted by lower COVID-19 revenues and business divestments respectively.
* Free cash flow was negative at $1.2 billion in Q1. Despite increased revenue and EPS expectations, it is still seen at about $3.9 billion in fiscal 2024, down 15.2% Y/Y.
McKesson Q1 Fiscal 2024 Results Overview
We previously covered McKesson Corporation's Q4 2023 results (the company has a fiscal year ending in March) in part 39 of our Top Government Contractors Series here. Below we will highlight the progress achieved in Q1 of fiscal 2024.
McKesson reports results in four main segments, namely U.S. Pharmaceutical at 90.2% of Q1 2024 revenues, Prescription Technology Solutions at 1.7%, Medical-Surgical Solutions at 3.5% and International at 4.7% of Q1 2024 revenues:
Figure 1: Q1 2024 McKesson segment revenues
Source: McKesson Q1 2024 Earnings Release
When we look at operating profit, the dominance of U.S. Pharmaceutical is less pronounced, with operating profit segment contributions split as follows:
- U.S. Pharmaceutical accounts for 61.6% of total operating profit.
- Prescription Technology Solutions contributes 17.2%.
- Medical-Surgical Solutions brings in 16.9%.
- International has a contribution of just 4.2%.
Operational Overview
U.S. Pharmaceutical was the best performing segment in Q1 2024, growing revenues 17.9% Y/Y (2023: +13%). The strong performance was due to higher prescription volumes, with gains in retail national account customers, specialty and GLP-1 (weight loss) products offsetting losses from branded to generic conversion. The margin picture was not as bright, with the end of the COVID-19 vaccine distribution contract lowering the operating margin to 1.15% of sales (full year 2023: 1.29%). As a result, operating profit growth was 8% in Q1 (2023: +6%).
Prescription Technology Solutions grew revenues 17% in Q1 (2023 +14%). Gains were driven by the third-party logistics and technology services businesses. Margins improved Y/Y to 17.93% (2023: 15.48%) on strong demand for access solutions on higher prescription volumes. As a result, operating profit grew 35% Y/Y in the quarter (2023: +15%).
Medical-Surgical Solutions revenues were up a meager 1% Y/Y (2023: minus 4%), driven by gains in extended and primary care businesses. The margin picture was bleak as well, down Y/Y to 9% in Q1 (2023: 10.43%). This resulted in a 12% drop in operating profit in the quarter (2023: down 4%).
International was the weakest performer in Q1, impacted by divestitures. Revenue was 47% lower Y/Y (2023 -38%). On a brighter note, margin improvement to 2.6% (2023: 2.42%) helped narrow the operating profit drop to 35% (2023: -22%).
On a consolidated basis, revenues were up 11% in Q1 (2023: +5%). Adjusted earnings per diluted share was up 25% to $7.27/share (2023: +9% to $25.94/share), helped by an abnormally low tax rate, a 6% reduction in share count, smaller operating expenses and growth in operating profit:
Figure 2: McKesson Q1 2024 results overview
Source: McKesson Q1 2024 Earnings Presentation
As a reminder, reported numbers are still impacted by the sale of European businesses last year, with underlying operating trends better than headline numbers.
Updated 2024 Outlook
Given the strong start of the year, McKesson boosted its adjusted EPS expectations to $26.55-27.35/share, up 3.9% relative to 2023:
Figure 3: McKesson updated 2024 outlook
Source: McKesson Q1 2024 Earnings Presentation
Revenue guidance was likewise increased - sales are now expected to grow 9.5% in fiscal 2024 (2023: +5%), with improvements in operating profit and lower interest expense contributing to the higher EPS outlook as well.
From a segment perspective, the revenue outperformance is concentrated in U.S Pharmaceutical, while operating profit is exceeding expectations at U.S Pharmaceutical and Prescription Technology Solutions.
Despite increased revenue and EPS expectations, free cash flow is still seen at about $3.9 billion, down 15.2% Y/Y.
Capital Structure
McKesson ended Q1 with a net debt of just $3 billion, a negligible amount against a market capitalization of $59 billion. It should be noted that the company has $7.2 billion in litigation liabilities remaining under a 2022 settlement regarding the distribution of opioids.
The main use of free cash flow is forecast to be share repurchases, at about $3.5 billion in 2024, in line with 2023. Year-to-date, free cash flow was negative at $1.2 billion. The company spent $696 million on buybacks and $74 million in dividends during Q1.
Conclusion
McKesson is successfully navigating the end of the COVID-19 vaccine supply contract, with underlying business momentum and a low tax rate helping boost EPS growth faster than initially expected.
U.S Pharmaceutical and Prescription Technology Solutions were the two segments that achieved the highest results in the quarter, helping boost top-line and bottom-line guidance.
As a result, McKesson is in an ideal position to deliver high single digit EPS growth in fiscal 2025, with the base effect of European divestitures and the absence of the COVID-19 vaccine supply contract fading.
Monitoring public procurement activity remains a smart move that can provide key insights into a company’s financial health.
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This article was written by members of TenderAlpha's team and does not serve as a recommendation to buy McKesson or any other stock. TenderAlpha is not receiving compensation for it and we have no business relationship with any company whose stock is mentioned in this article.