Credit Suisse Cuts McKesson Shares To Underperform

McKesson Corporation MCK announced a downward EPS revision for the second time this year. The company seems to have “higher capital requirements and lower earnings ahead,” Credit Suisse’s Robert Willoughby said in a report.

He downgraded the rating on McKesson from Neutral to Underperform, while reducing the price target from$150 to $131. Referring to the company’s capital efficiency, Willoughby commented that it represented “less bang for the buck.”

Discrepancy Versus Peers

McKesson cited “irrational industry pricing” for its negative EPS revision. Although AmerisourceBergen Corp. ABC and Cardinal Health Inc CAH had also cited weaker pricing, they have “competitive advantages in generic sourcing capabilities from an invested capital standpoint,” due to which their practices “seem more consistent with maintaining high ROICs. [return on invested capital],” Willoughby noted.

Cardinal and AmerisourceBergen had more robust ROIC profiles. While McKesson’s average invested capital base was equal to the bases of both its competitors put together, yet the former’s NOPAT [net operating profit after tax] had grown at about half the CAGR over FY12-FY16, “with higher capital requirements and lower earnings ahead, in our view,” the analyst wrote.