Episode Details

McKesson Corporation (MCK) Q1 FY2027 — Revenue $105,380M UP 8%. Adjusted EPS $9.93 UP 20%, beating the $9.56 bar by $0.37 - the fourth straight beat - and FY2027 guidance was raised to $44.20-$45.00. But GAAP EPS was $5.15, DOWN 18%, and adjusted EARNINGS rose only 14%. McKesson reported two earnings numbers: GAAP EPS of $5.15, down 18%, and adjusted EPS of $9.93, up 20%. The $4.78 gap is six times the entire FY2026 gap of $0.77. And adjusted earnings in DOLLARS rose only 14% - at last year's share count the same profit is $9.43, not $9.93, so 30% of the EPS growth was bought, not earned. THE CALL: HOLD (3/5, AN EXCELLENT BUSINESS, ALREADY PAID FOR) — base-case value ~$913.0 vs ~$877.23 today. KEY METRICS: - CALL: HOLD 3/5, fair value ~$913 vs the $877.23 pre-print close (+4%), BELOW the Street's $949.73 average (+8.3%). Base $913 (FY2027 FCF $5,900M growing 5.5% then 3.75%, 8.5% discount, 2.5% terminal); bull $1,131 (7.5% growth - needs Wellverse to unlock value Apollo did not price); bear $604 (3.5% growth, 9% discount, less $5,058M of litigation liabilities). Four percent of upside is inside our own error bars: a fair price, not a good one. - A THIRD OF THE EPS GROWTH WAS BOUGHT, NOT EARNED. Adjusted EARNINGS $1,183M, up 14.1%. Adjusted EPS $9.93, up 20.2%. The gap is the denominator: 119.2M diluted shares vs 125.5M. Put last year's count on this year's profit and $1,183M/125.5M = $9.43 - so $0.50 of the $1.67 of growth, 30%, is the buyback. Extend it: FY2026 adjusted earnings were ~$4,858M; the FY2027 midpoint at a ~115M average count is ~$5,129M. That is ~6% growth in profit DOLLARS against 13-15% of guided EPS growth. - THE RAISE IS THE BEAT. Q1 cleared the $9.56 consensus by $0.37. The full-year midpoint went $44.20 to $44.60 - up $0.40. The entire raise is the beat flowing through; the remaining nine months were lifted by about three cents. - THE $4.78 GAAP GAP IS ONE LINE AND A PRIVATE-EQUITY CHEQUE. On June 1 McKesson sold ~13% of Medical-Surgical (renamed Wellverse Aug 5) to Apollo for $1,238M net. As a redeemable interest it is carried at redemption value, and the 10-Q rollforward shows that value rising $374M in four weeks. It runs through noncontrolling interests, which jumped from $47M to $418M - so net income rose 24% while the common slice fell 22%. One outlet already called the print a MISS by comparing GAAP $5.15 to a non-GAAP bar. - THE CAPITAL RETURN DID NOT COME FROM OPERATIONS - AND THE MIX SHIFT IS THE REAL STORY. Free cash flow was NEGATIVE $372M, yet $2,632M went back to shareholders, funded by $3,215M of new debt (total debt $6,526M to $9,729M) and Apollo's cheque. Meanwhile Prescription Technology does 1.5% of revenue and 16.9% of segment profit at a 19.35% margin, and Oncology grew profit 41%; together they went from 12.4% of revenue and 35.6% of profit a year ago to 15.0% and 39.4%. The cash conversion cycle is NEGATIVE 7.4 days and ROIC is 27.9%. What to watch: UP: Rx Tech plus Oncology passing 45% of segment profit, a Wellverse valuation above Apollo's implied ~$9.5B, or full-year FCF above $6B. BEAR: N. American Pharma margin below 0.95%, total debt through $12B, or a cut to the back nine months. Also on YouTube: @ChargedAlpha DISCLAIMER: For informational and educational purposes only. Not financial advice. Do your own research before any investment decision.