McKesson Corp. (MCK) reported fiscal third-quarter earnings of $1.19 per share, in line with the Zacks Consensus Estimate. However, earnings increased 13% from the year-ago profit of $1.05. Meanwhile, revenues increased 4% to $28.3 billion, driven by the strong performance of the Distribution Solutions business.
The Distribution Solutions segment grew 4% with the U.S. pharmaceutical distribution business, recording a 2% increase in revenues. The loss of two customer buying groups in the U.S. continued to impact the performance of this segment. We believe the performance of the segment will continue to be impacted by lost business through the remainder of the year.
Canadian revenues grew 8%, reflecting market growth. Medical-Surgical distribution revenues also increased (up 11%), 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 during the quarter.
The Technology Solutions segment recorded a 3% increase in revenues. While service revenues grew 6% reflecting the steady nature of the company’s products, software revenues were down 2%. Hardware revenues also declined (down 32%), reflecting lower rates at which hardware is attached as part of system implementations and overall reduced hardware component costs.
Gross profit for the quarter increased 8% to $1.5 billion. McKesson reported a 5% increase in operating expenses, which came in at $946 million. The higher expenses were mainly due to higher employee compensation costs, foreign exchange rate movements and higher legal expenses and legal settlement charges.
Based on its results in the first nine months of fiscal 2010, McKesson once again increased its guidance for fiscal 2010. The company now expects earnings in the range of $4.55−$4.70, 10 cents above the earlier guidance of $4.45−$4.60. McKesson should continue benefiting from the increased demand related to the flu season. The company expects the strong flu season to contribute 35−40 cents to fiscal 2010 EPS.
Competitor AmerisourceBergen (ABC) also increased its guidance for fiscal 2010 after reporting strong December quarter results.
McKesson is a major player in the pharmaceutical and medical supplies distribution market, and we believe that several factors such as an aging population, increased use of generics, growing demand for specialty pharmaceutical products, especially oncology drugs, and a strong flu season should help drive growth in the Distribution Solutions segment. The Technology Solutions segment is also well positioned for growth, given the government’s focus on reducing health care costs and the expanded use of information technology systems. We currently have a Neutral recommendation on McKesson.
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