McKesson Stock Gains 18% YTD: What's Driving the Rally?

McKesson MCK is witnessing strong momentum, with its shares having rallied 18.3% year to date compared with 0.6% growth of the industry. The S&P 500 Composite has risen 16.5% during the same time frame.

With healthy fundamentals and strong growth opportunities, this Zacks Rank #3 (Hold) company appears to be a solid wealth creator for its investors at the moment.

Headquartered in San Francisco, CA, McKesson is a healthcare services and information technology company with two operating segments — Distribution Solutions and Technology Solutions. The first segment distributes branded and generic pharmaceutical drugs, along with other healthcare-related products, on a global basis. It also provides practice management, technology, clinical support and business solutions. The second segment offers enterprise-wide clinical, patient care, financial, supply chain and strategic management software solutions.

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Catalysts Driving Growth

The rally in MCK's shares can be attributed to the strength of its robust U.S. Pharmaceutical business. This optimism, led by a solid first-quarter performance and increasing demand for healthcare, is expected to contribute further.

Investors seem to be optimistic regarding the updated earnings guidance. On first-quarter 2025 earnings call, McKesson raised its adjusted earnings per share guidance for fiscal 2025. It now expects adjusted EPS in the range of $31.75-$32.55 (previously $31.25-$32.05), which represents growth of 16-19% from the prior-year level. Revenues are expected to grow 15-17% from the prior-year figure.

The company recorded a significant uptick in its overall top line during the first quarter. This growth was primarily driven by the U.S. Pharmaceutical segment, which saw increased prescription volumes, including higher volumes from specialty products, retail national account customers and GLP-1 medications.

As a result of the major market disruption caused by COVID-19 during the past three years, McKesson has benefited from improved demand across numerous verticals within the medical sector, particularly surgeries. A rebound in demand-driven volumes is also being observed by the company. Sales are also being positively impacted by increasing product pricing.

In April, McKesson launched Project Oasis, an initiative aimed at advancing health equity for at-risk populations in underserved communities. The rising demand for extended and primary care is expected to drive the top line of the Medical-Surgical business in fiscal 2025.

However, a weak first-quarter Medical-Surgical business due to challenges in the primary care channel raises concerns. Although the company has started boosting its operational efficiency and increasing its cost optimization efforts, it will likely take a while to get reflected in the company's performance.     

Stocks to Consider

Some better-ranked stocks in the broader medical space are Universal Health Service UHS, Quest Diagnostics DGX and ABM Industries ABM. While Universal Health Service sports a Zacks Rank #1 (Strong Buy), Quest Diagnostics and ABM Industries carry a Zacks Rank #2 (Buy).

Universal Health Service has an estimated long-term growth rate of 19%. UHS' earnings surpassed estimates in each of the trailing four quarters, with the average being 14.58%.

Universal Health Service has gained 41.1% compared with the industry's 34.8% rise so far this year.

Quest Diagnostics has an estimated long-term growth rate of 6.20%. DGX's earnings surpassed estimates in each of the trailing four quarters, with the average surprise being 3.31%.

Quest Diagnostics shares have gained 3.7% so far this year compared with the industry's 10.2% rise.

ABM Industries' earnings surpassed estimates in each of the trailing four quarters, delivering an average surprise of 7.34%.

ABM's shares have risen 24.1% so far this year compared with the industry's 11.9% growth.

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