McKesson In-Line; Guidance Strong – Analyst Blog

 

McKesson Corp. (MCK) reported fiscal fourth-quarter 2010 earnings of $1.29 per share, in line with the Zacks Consensus Estimate. However, earnings increased 25% from the year-ago profit of $1.03. Meanwhile, revenues increased 2% to $26.6 billion, driven by the strong performance of the Distribution Solutions business.

 

Full year earnings increased 13% to $4.58, with revenues increasing 2%.

 

 

The Distribution Solutions segment grew 2% with the US pharmaceutical distribution business remaining flat. We believe the loss of two customer buying groups in the US impacted the performance of this segment.

 

Canadian revenues grew 23%, reflecting market growth and the favorable impact of foreign exchange. Medical-Surgical distribution revenues also increased (up 5%), benefiting from small acquisitions made by the company in late fiscal 2009 and an increase in demand due to the flu season. The Specialty Care Solutions business performed well, benefiting from the launch of a generic and the success of the swine flu vaccine program.

 

The Technology Solutions segment recorded a 2% increase in revenues. While service revenues grew 2% reflecting the steady nature of the company’s products, software revenues increased 5%. However, hardware revenues continued to decline (down 18% year-over-year).

 

Gross profit for the quarter increased 8% to $1.6 billion. McKesson reported a 4% increase in operating expenses, which came in at $1 billion.

 

 

McKesson provided stronger-than-expected guidance for fiscal 2011. The company expects earnings in the range of $4.72 – $4.92, well above the current Zacks Consensus Estimate of $4.71. Performance will be driven by the generics business, as well as strong bookings in the Technology Solutions business, which is expected to show modest growth in fiscal 2011. The Technology Solutions business had been affected by buying cycles and delayed implementations in fiscal 2010.

 

The company expects contributions from the flu business to return to normal levels. McKesson benefited by approximately 37 cents in fiscal 2010 due to the impact of the swine flu business. Meanwhile, operating expenses are expected to increase modestly in fiscal 2011.

 

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.

 

McKesson also announced an additional share buyback program worth $1 billion. With the new program, the company is now authorized to repurchase shares worth $1.5 billion. About $299 million of common stock was repurchased in fiscal 2010.

 

The company exited the year with $3.7 billion in cash and equivalents. In addition to share buybacks, we believe the company will also be on the lookout for acquisitions.

 

 

We currently have a Neutral recommendation on McKesson. The company 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. However, the company faces tough competition from players like Cardinal Health (CAH) and AmerisourceBergen (ABC).