McKesson Corp.’s (MCK) first quarter fiscal 2011 earnings of $1.10 per share surpassed the Zacks Consensus Estimate by $0.03 and the year-ago earnings by $0.04. The 4% year-over-year increase in earnings in the reported quarter was primarily attributable to the strong performance of its Distribution Solutions segment.
Revenues for the first quarter of fiscal 2011 climbed 3% to $27.5 billion. This was slightly better than the Zacks Consensus Revenue Estimate of $27.3 billion.
Quarter in Detail
McKesson operates through two segments: Distribution Solutions and Technology Solutions. Revenues at the Distribution Solutions segment grew 3% year-over-year to $26.7 billion in the reported quarter.
Revenues from the US pharmaceutical distribution business climbed 2% year-over-year in the reported quarter to$23.4 billion. Canadian revenues grew 20% to $2.6 billion in the reported quarter, reflecting market growth and the favorable impact of foreign exchange. Medical-Surgical distribution revenues remained flat during the reported quarter.
Recently, the company sold its wholly-owned subsidiary, McKesson Asia Pacific Pty Limited. The divested subsidiary provides phone and web-based healthcare services in Australia and New Zealand.
Revenues at the Technology Solutions segment climbed 2% year-over-year to $759 million in the reported quarter. Service revenues increased 1% year-over-year to $595 million. The marginal increase was primarily attributable to the higher software maintenance being partially offset by lower implementation revenues. While software revenues increased 4% in the reported quarter hardware revenues jumped 21% year-over-year to $29 million in the first quarter of fiscal 2011.
Gross profit for the quarter increased 7% to $1.4 billion. McKesson reported a 9% increase in operating expenses, which came in at $918 million in the reported quarter.
Fiscal 2011 Outlook Backed
The company reaffirmed its earnings guidance for fiscal 2011. The company continues to expect earnings in the range of $4.72 – $4.92. During the quarter, McKesson entered into an accelerated share buyback program worth $1 billion. The Zacks Consensus estimate for fiscal 2011 is $4.83 per share.
Our Take
McKesson is a major player in the pharmaceutical and medical supplies distribution market, and we believe that factors like aging population and the increased use of generics should help drive growth in the Distribution Solutions segment in the current fiscal year.
Longer-term, McKesson should benefit from expanding health insurance coverage. The Technology Solutions segment is also well-positioned for growth given the government’s focus on reducing healthcare costs and the expanded use of information technology systems.
Our Recommendation
McKesson is a Zacks #3 Rank (Hold) stock. This implies that the company is expected to perform in line with the broader US equity market over the next 1-3 months. We are also Neutral on McKesson in the long-term. Our long-term Neutral stance on the company indicates that the stock is expected to replicate its short-term performance, but over the next 6+ months. Consequently, we advise investors to retain the stock over the time-period.
