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Here's Why You Should Retain McKesson (MCK) Stock Right Now

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McKessonCorporation (MCK - Free Report) is well poised for growth, backed by strategic collaborations and strength in the Distribution Solutions segment. However, the company’s opioid-related litigation expenses pose a threat.

Shares of this Zacks Rank #3 (Hold) company have fallen 7.6% in the past six months compared with the industry’s 2.4% decline. The S&P 500 Index has fallen 3.6% in the same time frame.

McKesson — with a market capitalization of $46.32 billion — is a healthcare services and information technology company. Its earnings are anticipated to improve 10.4% over the next five years. The company’s earnings beat estimates in two of the trailing four quarters and missed the same in the other two, the average surprise being 3.42%. Its earnings yield of 7.66% also compares favorably with the industry’s 4.93%.

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What’s Favoring It?

McKesson continues to actively pursue deals, divestitures and acquisitions to drive growth. In April 2022, the company completed the divestiture of its retail and distribution businesses in the United Kingdom to Aurelius.

During the fiscal 2022, the company completed the sale of its Austrian business to Quadrifolia management and the remaining share of its German joint venture to Walgreens Boots Alliance. McKesson is currently progressing with the divestiture of its European business. These divestitures will allow the company to focus on its key growth market — the United States.

In June 2022, McKesson formed a joint venture with HCA Healthcare (HCA - Free Report) to create a fully integrated oncology research organization. Per the deal, McKesson and HCA will integrate their respective research units — US Oncology Research (USOR) and Sarah Cannon Research Institute (SCRI).

The newly created entity, with the combined capabilities of SCRI and USOR, is expected to boost clinical research, ramp up the development of drugs, lead to better data and analytic capabilities, and pave the way for a wider portfolio of clinical trials. The deal between McKesson and HCA was completed in October.

McKesson is a major player in the pharmaceutical and medical supplies distribution market. The Distribution Solutions segment caters to a wide range of customers and businesses, and stands to benefit from increased generic utilization and inflation in generics, courtesy of an aging population and several patent expirations in the next few years.

During the fiscal third quarter of 2023, McKesson’s growth was led by its strong performance across all segments, except the International segment, which was marred by unfavorable currency movement. The divestiture of McKesson’s Austrian business also hurt its growth.

The company removed a major overhang during the fiscal first quarter by signing a settlement deal related to the opioid-related claims of all 50 states, as well as the District of Columbia and all eligible territories. These developments will close the long-pending litigations that have been hurting the company’s goodwill, while also reducing its legal expenses.

What’s Hurting the Stock?

McKesson’s broad settlement of opioid-related claims of states and municipalities is likely to drive expenses for the company in the short term. The company had to pay up to approximately $7.4 billion to the Settling Governmental Entities, per the settlement deal.

Estimates Trend

For fiscal 2024, the Zacks Consensus Estimate for revenues is pegged at $286.04 billion, indicating a 3.7% increase from the previous year. The same for adjusted earnings per share (EPS) stands at $26.32, implying a 1.5% increase from the previous year.

Stocks to Consider

Some better-ranked stocks from the broader medical space are Alcon (ALC - Free Report) and Avanos Medical (AVNS - Free Report) , both carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Alcon’s EPS has risen from $2.51 to $2.56 for 2023, in the past 30 days. ALC has lost 6.2% in the past six months. Alcon delivered an average earnings surprise of 12.37%, in the last four quarters.

Earnings estimates for Avanos Medical have improved from $1.64 to $1.68 for 2023, in the past 30 days. AVNS stock has risen 9.4% in the past six months. Avanos Medical delivered an average earnings surprise of 11.01%, in the last four quarters.

Earnings estimates for Embecta have increased from $1.90 per share to $2.33 for fiscal 2023, in the past 30 days. EMBC stock has declined 7.9% in the past six months. Embecta delivered an average earnings surprise of 38.86%, in the last four quarters.

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