McKesson Grows Steadily - Analyst Blog


McKesson Corp. 's ( MCK ) third quarter fiscal 2012 earnings of $1.40 per share (excluding special items) outperformed both the Zacks Consensus Estimate of $1.37 per share and the year-ago earnings of $1.28 per share. Higher revenues and lower share count helped boost the earnings.

Revenues for the quarter climbed 9% to $30.8 billion, ahead of the Zacks Consensus Estimate of $30.2 billion. Strong performance of McKesson's two segments, aided by the acquisition of US Oncology, led to the upside.

Including one-time items, McKesson reported third quarter earnings of $1.20 per share, up from 60 cents reported in the year-ago period. Earnings included a pre-tax, non-cash charge of $27 million related to the average wholesaler's price ( AWP ) litigation.

Quarter in Detail

McKesson operates through two segments: Distribution Solutions and Technology Solutions. Revenues at the Distribution Solutions segment went up 9% to $30.0 billion in the reported quarter. Strong growth in US pharmaceutical direct distribution and services revenues led to the upside. Market growth, the company's business mix and the acquisition of US Oncology also contributed to the quarter's performance.

Revenues from the US pharmaceutical distribution business came in at $26.8 billion, 11% higher than the year-ago figure. The company reported steady demand across all its pharmaceutical and Medical-Surgical distribution businesses.

Canadian revenue declined 4% to $2.5 billion, dragged down by the price restrictions imposed by the government on generic drugs. Medical-Surgical distribution revenue climbed 2% to $760 million, reflecting steady market growth.

Revenues at the Technology Solutions segment scaled up 4% to $823 million, with all business segments contributing to growth.

Within the Technology Solutions segment, service revenue increased 2% to $643 million. While software revenue climbed 13% to $152 million, hardware revenue increased 8% to $28 million.

Gross profit for the quarter went up 7% to $1.6 billion. McKesson reported a 9% increase in operating expenses, which came in at $995 million. Higher operating expenses were related to the acquisition of US Oncology.

During the reported quarter, the company authorized additional share repurchase of up to $650 million, bringing the total authorization to about $1.5 billion.

Outlook Reaffirmed

McKesson reiterated its outlook for fiscal 2012. The company expects earnings (excluding special items) in the range of $6.19 - $6.39 share. The guidance excludes acquisition-related expenses of 7 cents, 48 cents related to the amortization of acquisition-related intangible assets and 37 cents related to litigation reserve adjustments.

The Zacks Consensus Estimate for fiscal 2012 lies towards the higher end of the guidance range at $6.33 per share.

With blockbuster drugs like Pfizer Inc. 's ( PFE ) Lipitor and Johnson & Johnson 's ( JNJ ) Concerta having lost protection in calendar year 2011, the company expects to record robust generic revenues in fiscal 2012.

Further, McKesson expects operating expenses to grow about 2% - 4% in fiscal 2012. The forecast excludes the impact of the acquisition of US Oncology.

For fiscal 2012, McKesson expects to generate at least $2 billion of cash flow from operating activities. Capital spending is anticipated to lie in the range of $450 - $500 million.

Drug Trading Co. Acquisition

Along with third quarter financial results, the company also announced its plans to acquire Drug Trading Company Limited for CAD $920 million. Drug Trading is an independent banner of Katz Group Canada Inc. and Medicine Shoppe Canada Inc. Katz Group operates an integrated retail pharmacy network in Canada.

McKesson expects to complete the transaction in the first half of calendar year 2012. Following the acquisition, the company plans to integrate Drug Trading Co. into its Canadian pharmaceutical distribution and services business.

McKesson does not expect this transaction to impact FY12 earnings, but expects FY13 earnings to gain 10 - 20 cents from the deal.

Our View

We currently have a Neutral recommendation on McKesson, which carries a Zacks #3 Rank (short-term Hold rating). We are impressed by the company's performance and believe that the acquisition of Drug Trading Co. is in line with McKesson's objective of expanding its business in Canada.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Stocks

Referenced Stocks: AWP , JNJ , MCK , PFE

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