Short answer
Because the company now expects a higher adjusted earnings‑per‑share (EPS) for the full‑year, the “earnings” side of any valuation multiple gets larger. If the market price of McKesson’s shares does not move immediately, the forward‑looking multiples (e.g., P/E, EV/Adj‑EBITDA, price/adjusted‑earnings) will fall – i.e., the stock will look cheaper on a valuation‑basis. If investors price‑in the higher earnings by bidding the stock up, the multiples may stay roughly unchanged or even rise a little, but the primary mechanical effect of the guidance lift is a compression of forward multiples.
Below is a step‑by‑step breakdown of why and how the raised full‑year adjusted EPS guidance influences McKesson’s valuation multiples.
1. What the guidance change actually means
| Item | Prior guidance (assumed) | New guidance (announced) | % change |
|---|---|---|---|
| FY 2026 Adjusted EPS (per share) | $X.XX (previous estimate) | $Y.YY (raised) | +Δ% |
The exact numbers are not disclosed in the brief, but the press release explicitly says the full‑year adjusted EPS guidance has been *raised*.
- Adjusted EPS is the earnings figure that analysts use for forward‑looking multiples (P/E, EV/Adj‑EBITDA, etc.).
- A higher EPS forecast means the denominator in those ratios will be larger.
2. Mechanical impact on the most common multiples
| Multiple | Formula | Effect of higher EPS (price unchanged) |
|---|---|---|
| Forward P/E | Share price ÷ FY 2026 Adjusted EPS | ↓ – denominator ↑, so ratio falls. |
| EV/Adj‑EBITDA | Enterprise value ÷ FY 2026 Adjusted EBITDA (≈Adj‑EBITDA ≈ Adj‑EPS × Shares) | ↓ – higher EBITDA lowers the ratio. |
| Price/Adj‑Earnings (price/adjusted‑earnings) | Same as forward P/E | ↓ |
| EV/Adj‑Net‑Income | EV ÷ FY 2026 Adjusted Net Income | ↓ (net income rises with EPS). |
| Price/Sales | Share price ÷ FY 2026 Revenue per share | No direct effect (revenue unchanged). |
Result: All earnings‑based valuation multiples compress (move lower) if the market price stays static.
3. How the market typically reacts
Immediate price reaction –
- If investors view the EPS lift as a “good‑news” signal and bid the stock up, the price increase partially offsets the larger EPS.
- In practice, the price usually rises less than proportionally to the EPS increase, so the net effect is still a lower forward multiple (i.e., a more attractive valuation).
- If investors view the EPS lift as a “good‑news” signal and bid the stock up, the price increase partially offsets the larger EPS.
Short‑term analyst revisions –
- Sell‑side analysts will update their earnings models, lowering their forward P/E targets.
- Consensus estimates on Bloomberg/FactSet/Refinitiv will show a revised lower forward P/E for McKesson.
- Sell‑side analysts will update their earnings models, lowering their forward P/E targets.
Long‑term valuation –
- Over the next 6‑12 months, the higher earnings base will be baked into the “fair‑value” price.
- If the market believes the earnings lift is sustainable, the price may re‑price upward, bringing the forward P/E back toward historical levels (e.g., 12‑14× for a stable, low‑growth pharma distributor).
- If the lift is viewed as a one‑off or marginal, the price may stay relatively flat, leaving the compressed multiple in place.
- Over the next 6‑12 months, the higher earnings base will be baked into the “fair‑value” price.
4. Quantitative illustration (using a hypothetical example)
Assume:
| Metric | Prior estimate | New estimate |
|---|---|---|
| FY 2026 Adjusted EPS | $5.00 | $5.50 |
| Current share price | $120 | (unchanged) |
| Shares outstanding | 1.0 bn | 1.0 bn |
| Enterprise value (EV) | $70 bn | $70 bn (unchanged) |
| Adjusted EBITDA (≈ 1.5× EPS) | $7.5 bn | $8.25 bn |
| Multiple | Prior | New (price unchanged) |
|---|---|---|
| Forward P/E | 120 ÷ 5.00 = 24.0× | 120 ÷ 5.50 = 21.8× |
| EV/Adj‑EBITDA | 70 ÷ 7.5 = 9.3× | 70 ÷ 8.25 = 8.5× |
If the market pushes the price up to $130 to reflect the higher earnings:
| Multiple | New price $130 |
|---|---|
| Forward P/E | 130 ÷ 5.50 = 23.6× |
| EV/Adj‑EBITDA | 70 ÷ 8.25 = 8.5× (EV unchanged) |
Even with a price increase, the EV/Adj‑EBITDA stays compressed, and the forward P/E remains *below** the prior 24× level.*
5. What this means for investors and analysts
| Takeaway | Implication |
|---|---|
| Cheaper forward valuation | A lower forward P/E suggests the stock is now priced more attractively relative to its earnings outlook. |
| Potential upside | If the market has not fully priced in the higher earnings, there may be short‑term upside as the price adjusts. |
| Re‑calibration of peer comparisons | McKesson’s multiples will move closer to or even below those of comparable drug‑distribution peers (e.g., AmerisourceBergen, Cardinal Health). |
| Risk considerations | The sustainability of the EPS lift matters. If analysts view it as a one‑time benefit, the price may not rise much, leaving the compressed multiples in place. If it reflects a structural improvement (e.g., higher margins, better cost control), the market may re‑price the stock higher, normalising the multiples. |
6. Bottom line
- Mechanically: Raising FY 2026 adjusted EPS guidance compresses all earnings‑based valuation multiples (forward P/E, EV/Adj‑EBITDA, etc.) because the denominator gets larger.
- Market‑driven: If investors bid the stock up, the multiples may stay roughly constant; however, historically the price rise is smaller than the EPS increase, so the net effect is still a lower forward multiple.
- Analyst consensus: Expect a downward revision of McKesson’s forward P/E in research portals, reflecting the new guidance.
- Investment perspective: The lower multiples can be interpreted as a valuation improvement and may create short‑term upside if the market has not yet fully priced the higher earnings outlook.