Management at McKesson Corporation (MCK) recently raised its earnings guidance for 2011 following the company’s solid third quarter earnings surprise.
This prompted the majority of analysts to raise their estimates for both 2011 and 2012, sending the stock to a Zacks #2 Rank (Buy).
The company also produces strong cash flow and pays a dividend that yields 0.9%.
Company Description
McKesson Corporation provides services and products to health care providers and payors to help them reduce costs, streamline processes and improve patient care and medication safety.
It is headquartered in San Francisco, California and has a market cap of $20.2 billion.
Third Quarter Results
Earnings per share came in at $1.12, beating the Zacks Consensus Estimate by a penny. It was a 6% decrease from the same quarter in 2010.
Revenue was flat year-over-year. The U.S. pharmaceutical distribution and services segement fell 1% due to a decline in sales to customers’ warehouses.
Canada pharmaceutical distribution and services revenues was a bright spot, increasing 6% year-over-year. Meanwhile, the technology solutions segment saw a 2% gain in sales.
The overall gross margin held steady at 5.2% of total sales. Adjusted operating income declined 12% due to slightly higher operating expenses.
Guidance Raised
Management raised its guidance for 2011 following the release of third quarter results. The company now expects to earn between $4.82 and $5.02.
Nearly every analyst raised his estimate for 2011 and 2012. Estimates have been climbing higher over the last several months, as seen in the company’s Price & Consensus Chart:
It is a Zacks #2 Rank (Buy) stock.
The Zacks Consensus Estimate for 2011 is within guidance at $4.92, which represents solid 8% growth over 2010 EPS. The 2012 estimate is currently $5.59, equating to 14% growth.
Dividend
The company has raised its dividend only twice since 1999. Its payout ratio is relatively low at 16%, so if earnings rise as projected, I’d expect more increases on the horizon.
It currently yields 0.9%.
Shares have soared almost 40% since late August. Despite the run up, valuation remains in-check. The stock trades at 16.3x forward earnings, a little higher than the industry average of 14.0x, but certainly within reason given the rising trend in earnings estimates.
It sports a PEG ratio of 1.5.
Todd Bunton is the Growth & Income Stock Strategist for Zacks.com.
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