McKesson Has A Lot Of Moving Parts; Bank Of America Reinstates At Neutral

Bank of America analysts Steven Valiquette and Jonathan Yong see a lot of moving parts in McKesson Corporation (NYSE: MCK) in the areas of generic pricing and customers. As a result, the two analysts have reinstated the stock at Neutral with a price objective of $190.00 on the shares of the company.

The analysts indicated that McKesson offsets some negatives, even as generic headwinds persist. The two analysts said, "We are reinstating coverage of McKesson with a Neutral rating and a $190 price objective. The company has endured some well-documented customer losses over the past year or so, virtually all of which are related to M&A transactions among the customer base (and not related to operational issues at MCK)."

However, the brokerage believes that the timing could have not been worse for McKesson, as customer attrition is occurring simultaneously with a slowdown in generic drug pricing in CY16, which has served as a major tailwind for the industry in CY14 and 1H15.

Bank of America also said, "We are Neutral on all three drug distribution stocks as we believe generic pricing will continue to weaken in 2H16 and 2017, which will likely keep a lid on all three stocks."

However, the two analysts see a big swing factor for McKesson in FY18 around RAD contract. Its FY18 EPS estimate is $14.81 including retention of $0.70–0.80 EPS due to the RAD contract. The brokerage said that if EPS could theoretically slip to ~$14.00 due to RAD loss in FY18, it assigned a conservative 13x P/E to reach its Price target.

On Tuesday, the stock traded 0.53 percent down.