TipRanks Smart Value #66: Compounding Cure

Shrilekha Pethe on June 9, 2026

Dear Investors,

Welcome to the 66^th edition of the TipRanks Smart Value Newsletter.

This Week’s Top Value Pick: McKesson (MCK)

McKesson (MCK) is a leading healthcare services and pharmaceutical distribution company that supplies prescription drugs, medical products, and technology-enabled healthcare solutions across North America. In addition to its core distribution operations, the company has expanded into specialty healthcare services, oncology care, patient access solutions, and healthcare technology. McKesson benefits from long-term growth drivers including rising pharmaceutical utilization, increasing healthcare spending, and the growing importance of specialty medicines.

Prescription Pipeline

McKesson’s history spans nearly two centuries, tracing its origins to 1833 when John McKesson and Charles Olcott established a pharmaceutical import and distribution business in New York. Over time, the company evolved from a regional drug wholesaler into one of the largest healthcare services and pharmaceutical distribution companies in North America, building extensive relationships across manufacturers, pharmacies, hospitals, physician practices, and other healthcare providers. McKesson serves as a critical intermediary within the healthcare supply chain, helping ensure the efficient distribution of pharmaceuticals and medical products throughout the United States and Canada.

A major driver of McKesson’s long-term expansion has been the steady growth of its pharmaceutical distribution network. The company invested heavily in distribution infrastructure, logistics capabilities, automation, and technology systems that allow it to reliably and efficiently process and deliver large volumes of branded, generic, specialty, biosimilar, and over-the-counter medicines. These investments strengthened the company’s competitive position while enabling it to benefit from rising prescription drug utilization, growing healthcare spending, and increasing demand for supply-chain outsourcing across the healthcare industry.

The company accelerated its expansion strategy during the past decade through a series of acquisitions designed to broaden its geographic reach and diversify its healthcare services portfolio. In 2014, McKesson completed its largest acquisition of the period when it acquired a controlling stake in Celesio AG. Celesio operated across 16 countries and supplied more than 65,000 pharmacies and hospitals through an extensive wholesale network. The acquisition significantly expanded McKesson’s international presence and established a major European pharmaceutical distribution platform alongside its North American operations.

McKesson continued expanding in 2016 through the acquisition of Rexall Health from Katz Group. The transaction added roughly 500 Canadian pharmacies and expanded the company’s distribution reach to approximately 1,300 additional pharmacy locations, strengthening its position in the Canadian healthcare market. McKesson and Change Healthcare merged most of their respective healthcare IT and technology solutions businesses in 2017 into a new joint venture, with McKesson holding a roughly 70% stake and Change Healthcare’s existing stockholders retaining the remainder. While expanding internationally and in healthcare technology, McKesson also invested in higher-value healthcare services and patient access solutions. That same year, the acquisition of CoverMyMeds established a leading platform for electronic prior authorization and prescription access, enabling patients to obtain medications more efficiently while strengthening relationships with providers, pharmacies, health plans, and pharmaceutical manufacturers. This business later became a key component of McKesson’s Prescription Technology Solutions segment.

Precision Pivot

Beginning in 2020, management initiated a major portfolio transformation. McKesson exited its ownership position in Change Healthcare through an exchange offer that monetized the investment while reducing the company’s outstanding share count. The strategic shift accelerated in 2021 and 2022 when the company announced plans to exit most of its European operations, including businesses acquired through the Celesio transaction. Management concluded that greater value could be created by concentrating capital and resources on North American healthcare markets and higher-growth areas such as oncology, biopharma services, physician services, and healthcare technology.

As part of this strategy, McKesson partnered with HCA Healthcare in 2022 to combine U.S. Oncology Research with Sarah Cannon Research Institute, creating a larger oncology research platform designed to expand access to clinical trials and accelerate cancer-care innovation. The company also acquired Genospace, a precision medicine and clinical trial matching company, strengthening its capabilities in personalized oncology care. Later that year, McKesson acquired Rx Savings Solutions, expanding its ability to improve medication affordability, transparency, and adherence while further strengthening its Prescription Technology Solutions platform.

These initiatives complemented the continued expansion of the U.S. Oncology Network and Ontada, strengthening McKesson’s presence in oncology care, specialty drug distribution, clinical research, physician practice support, and patient care services. The company also continued investing in its medical-surgical supply operations, automation, data analytics, and emerging artificial intelligence capabilities to improve efficiency and customer service.

The transformation continued in late 2024 when McKesson divested its Rexall and Well.ca businesses in Canada, reflecting management’s emphasis on directing capital toward higher-growth and higher-margin healthcare services businesses.

McKesson’s specialty-care strategy accelerated further in 2025. In April, the company acquired an 80% controlling interest in PRISM Vision, extending its physician-services platform into ophthalmology and retina care. Two months later, it acquired a 70% controlling interest in Community Oncology Revitalization Enterprise Ventures (Core Ventures). As the business and administrative services organization supporting Florida Cancer Specialists & Research Institute, one of the largest independent oncology practices in the United States, Core Ventures significantly strengthened McKesson’s oncology platform and deepened its presence in community-based cancer care.

In January 2026, McKesson completed the sale of its Norway retail and distribution operations, marking its final exit from Europe and concluding the strategic reversal of the Celesio acquisition. The transaction further reinforced management’s decision to focus resources on North American healthcare markets and higher-growth specialty-care opportunities.

Another significant step in this transformation is the planned separation of the Medical-Surgical Solutions business. Management reported that the business has already been operationally and legally separated, with audited carve-out financial statements completed. The process gained further momentum when Apollo Funds agreed to acquire an approximately 13% minority stake for $1.25 billion, implying an enterprise value of roughly $13 billion for the standalone company. In addition, the business has secured $2 billion of financing and is expected to raise another $2.25 billion through term loans. While most of the proceeds are currently expected to support share repurchases, management retains the flexibility to redeploy capital toward acquisitions if attractive opportunities emerge. McKesson will continue to maintain majority ownership and operating control until a future IPO is completed. Management believes the separation will allow both organizations to pursue more focused growth strategies while helping investors better recognize the value of each business.

These acquisitions, divestitures, partnerships, and operational investments have transformed McKesson from a broadly diversified healthcare distributor with significant international operations into a more focused healthcare services leader. The company has increased its exposure to oncology care, specialty pharmaceuticals, physician services, clinical research, patient access solutions, and healthcare technology, creating stronger earnings drivers, more disciplined capital allocation, and greater participation in some of the fastest-growing segments of the healthcare industry.

Growth Formula

McKesson generates most of its revenue through pharmaceutical distribution, purchasing medicines and medical products from manufacturers and supplying them to pharmacies, hospitals, physician practices, health systems, and other healthcare providers across North America. The company’s scale, logistics infrastructure, purchasing power, and technology capabilities enable it to efficiently move large product volumes while generating distribution margins and service fees.

The U.S. Pharmaceutical segment is McKesson’s largest business, accounting for approximately 82% of revenue. The segment distributes branded, generic, specialty, biosimilar, and over-the-counter medicines to a broad customer base that includes national and regional pharmacy chains, independent pharmacies, hospitals, and healthcare providers. It also provides specialty distribution and related services to physician practices and health systems. Although pharmaceutical distribution operates on relatively thin margins, the business benefits from long-term growth drivers such as rising prescription utilization, an aging population, increasing healthcare spending, and growing demand for specialty medicines.

Beyond traditional distribution, McKesson has expanded into healthcare services and technology through its Prescription Technology Solutions segment, which connects patients, providers, pharmacies, health plans, and pharmaceutical manufacturers through platforms such as CoverMyMeds and Rx Savings Solutions. These businesses improve access to medication, affordability, adherence, and prescription fulfillment while generating software-enabled and transaction-based revenue streams with higher margins than traditional distribution.

The company’s Oncology & Multispecialty segment further extends its role in specialty healthcare through specialty drug distribution, infusion services, group purchasing, direct-to-patient pharmacy capabilities, cell and gene therapy support, technology solutions, practice consulting, and vaccine distribution. The segment also supports the U.S. Oncology Network, one of the nation’s largest physician-led community oncology networks, strengthening McKesson’s position in cancer care delivery and specialty medicine.

The company also operates a Medical-Surgical Solutions business that supplies medical products, pharmaceuticals, and related services to a broad range of non-acute care customers. However, management has announced plans to separate the segment into an independent company as part of its broader portfolio optimization strategy.

In recent years, McKesson has increasingly focused its investments on oncology, specialty pharmaceuticals, biopharma services, physician services, and healthcare technology. Acquisitions and partnerships involving the U.S. Oncology Network, Ontada, Sarah Cannon Research Institute, PRISM Vision, and Core Ventures have expanded the company’s capabilities in physician practice support, clinical research, specialty drug services, data analytics, and patient care programs. These investments deepen customer relationships, create higher-value revenue opportunities, and increase exposure to some of healthcare’s fastest-growing markets.

Looking ahead, management plans to continue investing in these areas while leveraging McKesson’s customer relationships and ongoing investments in automation, data analytics, and artificial intelligence to support future growth.

Resilient Rx

The company’s oncology platform remains one of its most important growth engines. Management indicated that underlying oncology operating profit continues to grow at approximately 13% annually, consistent with long-term targets. While fiscal 2027 growth comparisons are affected by a non-recurring $51 million gain recorded in fiscal 2026, management emphasized that demand trends remain healthy. Severe winter weather briefly disrupted patient volumes in January, but demand recovered within the quarter and had no meaningful impact on results or FY2027 guidance. Through the U.S. Oncology Network, the company helps community oncology practices manage operations, access specialty medications, participate in clinical research, navigate an increasingly complex reimbursement environment, and adopt new therapies more efficiently. The company also continues to see a robust pipeline of physician practice acquisitions and partnerships through this network, which should support future expansion opportunities.

Many cancer drugs are reimbursed under Medicare Part B, where physicians typically purchase the drug, administer it to patients, and then receive reimbursement from Medicare and other payers. The difference between the acquisition cost and reimbursement amount helps support the economics of oncology practices. As more biosimilars enter the market and Inflation Reduction Act (IRA)-related pricing changes affect certain therapies, investors worry that reimbursement spreads could narrow, potentially reducing profitability for providers and companies operating within the oncology ecosystem.

Management acknowledged that pricing dynamics will continue evolving but argued that McKesson’s scale provides a meaningful competitive advantage. Through its oncology network and group purchasing capabilities, the company can accelerate biosimilar adoption across hundreds of oncology practices, creating value for both providers and manufacturers. With 89 biosimilars approved and 72 launched, management views the still-early adoption cycle as a multi-year tailwind. Lower costs benefit patients and providers, while McKesson’s distribution scale, oncology network, and GPO relationships position it to facilitate the transition and earn incremental service revenue, reinforcing rather than threatening its oncology strategy.

The company has guided for revenue growth of approximately 4% to 8% for its North American Pharmaceutical business in fiscal 2027. While this outlook initially appears modest given continued growth in pharmaceutical spending, specialty medications, and prescription volumes, management explained that several comparison headwinds are masking the strength of the underlying business.

Management identified three factors that are making fiscal 2027 revenue growth appear slower than the underlying demand trends. First, fiscal 2026 benefited from a large customer onboarding that temporarily boosted pharmaceutical distribution volumes. Second, McKesson is no longer receiving the same level of revenue from Rite Aid following the retailer’s restructuring and store closures. Third, the company will face a full year of lower branded drug prices resulting from provisions of the IRA, whereas fiscal 2026 reflected only a partial-year impact.

The IRA allows Medicare to negotiate prices for certain high-cost branded drugs, which reduces the selling price of those medications. For pharmaceutical distributors such as McKesson, lower drug prices can reduce reported revenue even if the number of prescriptions dispensed remains unchanged because revenue is recorded based on the dollar value of products sold. As a result, the full-year impact of these pricing changes is expected to create a headwind to reported revenue growth in fiscal 2027, even though underlying prescription demand and distribution volumes remain healthy.

Despite these headwinds, specialty pharmaceuticals, including oncology therapies, biologics, and biosimilars, continue to represent an increasing share of the business and support profit growth that exceeds revenue growth. The company is also benefiting from ongoing productivity improvements, with efficiency gains from automation, technology investments, and supply-chain optimization contributing to margin expansion.

Another area of investor focus was the rapidly growing GLP-1 market and related services, which remain robust as GLP-1 revenue still increased 22% year-over-year. Demand for prior authorization, affordability, and patient-access services within the Prescription Technology Solutions segment also remains strong. Management noted that the segment’s relatively modest revenue guidance primarily reflects fluctuations within its third-party logistics business rather than weakness in its underlying technology or patient-access offerings.

Growth Infusion

Despite expectations for continued operating profit growth in fiscal 2027, McKesson’s free cash flow is projected to be approximately 13% lower than the prior year. Management attributed the anticipated decline primarily to favorable working-capital timing that boosted fiscal 2026 cash generation and to continued investments in automation, distribution infrastructure, and technology initiatives designed to strengthen the company’s competitive position, improve operational efficiency, and support future growth.

Capital expenditures totaled approximately $745 million during fiscal 2026, reflecting investments aimed at improving operational efficiency, expanding capacity, and enhancing long-term cash-generation capabilities. Management views these expenditures as strategic investments that should generate returns over time through productivity improvements and a more efficient supply-chain network.

The company also reiterated that acquisitions remain an important component of its growth strategy, particularly within higher-growth areas such as oncology, multispecialty physician services, and biopharma platforms. Importantly, management stressed that McKesson’s long-term cash-generation profile remains strong. As recent investments begin contributing to operating performance and efficiency gains flow through the business, the company expects cash conversion to improve over time. As a result, the projected free cash flow decline in fiscal 2027 appears to be driven largely by timing effects and growth investments rather than weakening fundamentals, while positioning the company for continued earnings and cash-flow growth over the longer term.

Finally, McKesson announced a planned leadership transition as longtime CFO Britt Vitalone prepares to retire. Vitalone will remain in an advisory role to support both the Medical-Surgical separation and leadership transition process, while CEO Brian Tyler has assumed the additional role of Chairman.

The company’s long-term growth strategy is centered on oncology, specialty pharmaceuticals, healthcare technology, and operational efficiency, despite near-term revenue and cash-flow comparisons that may obscure underlying business momentum.

Profit Pulse

Over the past three years, McKesson has delivered consistent growth, with revenue and adjusted EPS increasing at a CAGR of 10.2% and 15.3%, respectively. Growth was driven by rising prescription volumes, strong demand for specialty pharmaceuticals, oncology services, GLP-1 medications, and expanding adoption of Prescription Technology Solutions. Earnings grew faster than revenue as the company benefited from a more profitable business mix, continued expansion of its oncology and biopharma platforms, aggressive share repurchases, and strong cash generation that supported both acquisitions and shareholder returns.

This momentum continued in fiscal 2026 as McKesson demonstrated the benefits of its strategic focus on specialty care, healthcare technology, and operational efficiency. Revenue increased 12% year-over-year to $403 billion, while adjusted operating profit rose 15% to $6.5 billion. Adjusted EPS reached $39.11, representing growth of 18% from the prior year, or approximately 20% when excluding gains recognized in the previous year’s Ventures portfolio. The company also generated operating cash flow of $6.2 billion and free cash flow of $5.4 billion, both ahead of management’s guidance.

Fourth-quarter results reflected continued earnings strength despite a modest revenue miss. Revenue increased 6% year-over-year to $96.3 billion, while adjusted EPS rose 16% to $11.69, exceeding consensus expectations. McKesson’s financial profile remains strong, with a net debt-to-EBITDA ratio ranking among the top 30% in the industry, while its return on assets and return on invested capital rank among the top 20% and top 10%, respectively.

Performance was broad-based across the organization, with three of the company’s four operating segments delivering double-digit profit growth. At the same time, investments in automation, artificial intelligence, and distribution network optimization improved efficiency, contributing to a 293-basis-point reduction in operating expenses as a percentage of gross profit.

The North America Pharmaceutical segment, McKesson’s largest business, continued to benefit from growth in specialty medicines, health-system customers, and obesity treatments. Fourth-quarter revenue increased 3% year-over-year to $79.1 billion despite headwinds from branded pharmaceutical price reductions related to the Inflation Reduction Act. Management emphasized that while these pricing changes reduced reported revenue, they had no meaningful effect on profitability. GLP-1 medications remained a major contributor, generating $53 billion in full-year revenue, up 27% from the prior year. Segment operating profit increased 11%, supported by modest margin expansion.

The Oncology & Multispecialty segment delivered the strongest growth within the portfolio. Fourth-quarter revenue surged 35% to $12.7 billion, while adjusted operating profit increased 53% to $385 million. Recent acquisitions, including PRISM Vision and Core Ventures, contributed meaningfully to results, while underlying demand remained strong. During the year, the U.S. Oncology Network added more than 570 net new providers, marking its largest annual expansion since 2010. McKesson also strengthened its oncology ecosystem through Ontada’s expanding data capabilities and broader adoption of AI-powered clinical documentation tools.

Prescription Technology Solutions remained another important growth engine. Fourth-quarter revenue increased 12% to $1.5 billion, while adjusted operating profit rose 13% as demand for medication-access and affordability solutions continued to expand. The platform supported a record 3.4 million patients during the year and now connects more than 50,000 pharmacies, over one million providers, and more than 650 biopharma brands. Increased automation also improved productivity, enabling employees to serve significantly more patients than in prior years.

Looking ahead, management expects adjusted EPS of approximately $44.20 at the midpoint of fiscal 2027 guidance, representing growth of 12% to 14%. The outlook is supported by expected revenue growth of 5% to 9%, adjusted operating profit growth of 8% to 12%, and free cash flow of $4.5 billion to $4.9 billion. Excluding the effects of recent divestitures and investment gains, implied earnings growth remains near the upper end of McKesson’s long-term target range.

For fiscal 2027, Prescription Technology Solutions is expected to generate revenue growth of 2.5% to 6.5%. Management noted that the relatively modest outlook primarily reflects expected variability within the third-party logistics business, which accounts for roughly 55% of segment revenue. Because the business provides warehousing, inventory management, and distribution services for pharmaceutical manufacturers, revenue can fluctuate based on the timing of new drug launches, commercialization schedules, and manufacturer inventory decisions rather than changes in underlying demand.

Management also reaffirmed its long-term operating profit growth targets of 5% to 8% for North America Pharmaceutical, 13% to 16% for Oncology & Multispecialty, and 10% to 13% for Prescription Technology Solutions, underscoring confidence in the durability of the company’s growth strategy.

Enduring Remedy

Over the past year, MCK’s shares have gained approximately 8%, supported by consistent earnings outperformance, multiple guidance increases, strong growth in GLP-1 drug distribution, and the continued expansion of its oncology platform through acquisitions such as PRISM Vision and Core Ventures. Investor sentiment also benefited from the planned separation of the Medical-Surgical Solutions business, the completion of McKesson’s exit from Europe, and an aggressive share repurchase program that has continued to enhance per-share earnings.

The stock currently trades at a modest premium to its historical averages based on non-GAAP trailing and forward P/E ratios, forward EV/EBITDA and price-to-cash-flow multiples. This suggests that investors are placing a higher value on McKesson’s future growth prospects, supported by its expanding oncology and specialty-care businesses, healthcare technology capabilities, and increasingly focused portfolio.

Relative to peers such as Cencora and Cardinal Health, McKesson trades toward the moderate-to-high end of the valuation range based on non-GAAP trailing and forward P/E ratios, forward EV/EBITDA forward price-to-cash-flow multiples. However, this premium appears justified by the company’s superior earnings growth profile, market-leading oncology platform, disciplined portfolio optimization efforts, and strong capital-allocation track record. Following its exit from Europe and the planned separation of the Medical-Surgical business, McKesson is becoming a more focused healthcare-services company with greater exposure to higher-growth and higher-margin businesses. These operations typically command higher valuation multiples due to their stronger growth prospects, recurring revenue characteristics, and favorable margins. Combined with a strong acquisition track record, these factors position the company to continue compounding earnings at an attractive rate. As a result, while the stock is not deeply undervalued on traditional valuation measures, the market may still be underappreciating McKesson’s improving business mix, durable growth drivers, and ability to generate strong shareholder returns over time.

Analysts remain bullish about MCK citing the company’s strong revenue growth and significant earnings recovery in recent years. These results reflect resilient healthcare demand, improved operational execution, and the successful expansion into higher-value healthcare services. At the same time, McKesson’s robust cash generation provides the flexibility to fund acquisitions, automation investments, dividends, and share repurchases while supporting future growth initiatives.

Reflecting this outlook, Wall Street’s consensus price target implies approximately 24% upside from current levels, while the most optimistic estimates suggest potential upside of approximately 37%. In addition, discounted cash flow analysis indicates that the shares may be trading at an estimated 37% discount to intrinsic value, implying that the market may not yet fully reflect McKesson’s long-term earnings potential.

McKesson has also continued to return substantial capital to shareholders. During the fourth quarter of fiscal 2026, the company repurchased approximately $2.2 billion of its shares and entered into a new $2.25 billion accelerated share repurchase program. The Board of Directors also approved an additional $5 billion of repurchase authorization, bringing total remaining authorization to $7.7 billion as of April 2026. Management expects to repurchase approximately $5 billion of stock during fiscal 2027.

The company complements these buybacks with a steadily growing dividend. McKesson has paid dividends for more than 30 consecutive years and has increased its dividend for 12 straight years. Over the past decade, the dividend has grown at an annual rate of approximately 12.4%, while maintaining a conservative payout ratio of about 8.5% of adjusted earnings. For the most recent quarter, the company declared a dividend of $0.82 per share.

Investing Takeaway

McKesson’s value proposition lies not in a deeply discounted valuation, but in the market’s potential underappreciation of how dramatically the business has evolved. The company has transformed from a broad pharmaceutical distributor into a more focused healthcare-services platform with growing exposure to oncology, specialty pharmaceuticals, physician services, patient-access solutions, and healthcare technology. These businesses typically generate stronger growth, more recurring revenue, and higher margins than traditional distribution operations.

At the same time, McKesson continues to benefit from its dominant position in pharmaceutical distribution, strong cash generation, disciplined capital allocation, and consistent share repurchases. The planned Medical-Surgical separation could further unlock value by allowing investors to better recognize the worth of each business independently. For long-term value investors, McKesson offers a combination of durable competitive advantages, improving business quality, and shareholder-friendly capital returns that are not fully reflected in the current share price.

Category: Smart Value