McKesson Corp.’s (MCK) first quarter fiscal 2012 earnings of $1.27 per share (excluding special items) outperformed the Zacks Consensus Estimate by 13 cents and the year-ago earnings by 11 cents. Higher revenues and lower share count helped boost earnings.

Revenues for the quarter climbed 9% to $30.0 billion, inching ahead of the Zacks Consensus Estimate of $29.0 billion. Strong performance of the two segments of the company, aided by the acquisition of US Oncology, led the revenues upside.

Quarter in Detail

McKesson operates through two segments: Distribution Solutions and Technology Solutions. Revenues at the Distribution Solutions segment went up 9% to $29.2 billion in the reported quarter. Strong growth in the US pharmaceutical direct distribution and services revenues led to the upside.

Revenues from the US pharmaceutical distribution business came in at $25.7 billion, 10% higher than the year-ago figure. The increase was primarily due to market growth and the acquisition of US Oncology.

Canadian revenue remained flat at $2.7 billion, due to the impact of government imposed price restrictions on generic drugs. Medical-Surgical distribution revenue climbed 7% to $731 million.

Revenues at the Technology Solutions segment scaled up 6% to $802 million, as a result of better-than-expected achievement of certain customer implementation milestones, as well as the timing of payments from customers.

Within the Technology Solutions segment, service revenue increased 6% to $630 million. While software revenue climbed 7% to $144 million, hardware revenue slid 3% to $28 million in the first quarter of 2012.

Gross profit for the quarter went up 8% to $1.5 billion. McKesson reported a 10% increase in operating expenses, incurring $1.0 billion. Higher operating expenses resulted from the acquisition of US Oncology.

The company repurchased $650 million of common stock in the reported quarter, leaving about $850 million worth of shares to be repurchased under the current share repurchase program.

2012 Outlook Raised

McKesson expects fiscal 2012 earnings (excluding special items) to range between $6.09 and $6.29 per share, increased from the earlier guidance range of $5.99 to $6.19.

The company has decreased its fiscal 2012 tax rate estimate to 32% from 33%, resulting in the increased earnings guidance. The fiscal 2012 Zacks Consensus Earnings Estimate of $6.13 lies within the company’s guidance range.

The earnings guidance excludes the 7 cents that the company expects to incur in relation to the US Oncology acquisition and 47 cents related to amortization of acquisition-related intangible assets.

Additionally, McKesson expects earnings to be weighted toward the second half of fiscal 2012, with fourth quarter 2012 being exceptionally strong.

McKesson continues to expect Technology Solutions revenues to increase slightly in fiscal 2012 compared with fiscal 2011.

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

For fiscal 2012, McKesson continues to expect cash flow from operating activities to be about $2.0 billion. Capital expenditure and capitalized software are anticipated to lie in the range of $450 – $500 million.

Outperform on McKesson

We currently have an Outperform recommendation on McKesson. McKesson is a major player in the pharmaceutical and medical supplies distribution market.

We believe that several factors like aging population, increased use of generics, and growing demand for specialty pharmaceutical products, especially oncology drugs, should help drive growth in the Distribution Solutions segment.

 
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