Goldman Drops McKesson To Neutral, Sees Limited Upside

McKesson Corporation MCK has been generating weak earnings growth, and the lowering of brand pricing presents “an additional risk,” Goldman Sachs’ Robert P. Jones said in a report. He downgraded the rating on the company from Buy to Neutral, while reducing the price target from $210 to $189.

McKesson is facing headwinds from generics, M&A-related contract losses and currency. Against this backdrop, moderation in brand pricing represents an additional risk to earnings growth. Jones added that while these headwinds are already known, there is lack of compelling drivers for earnings, “outside of unknown M&A or capital deployment.”

Brand Pricing Issues Weigh

McKesson could end up with a shortfall of ~$60 million to its FY17 guidance in case brand inflation continued to be in the 7 percent range, rather than the 10 percent assumed in the guidance. “While MCK had been expecting modestly lower brand inflation, we think the slowdown could still present a headwind vs. expectations,” Jones mentioned.

Growth Outlook

McKesson’s core business is now expected to grow 5 percent in FY17, in-line with peers. The guidance implies double-digit Distribution EBIT growth in the back half of the year, which does not seem to incorporate the slowdown in brand pricing witnessed to date, the analyst commented.

The EPS estimates for FY17, FY18 and FY19 have been reduced from $13.75 to $13.57, from $15.05 to $14.81 and from $17.02 to $16.75, respectively.

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