McKesson Corp.’s (MCK) fourth quarter fiscal 2011 earnings of $1.66 per share (excluding special items) beat the Zacks Consensus Estimate by 6 cents and the year-ago earnings by 40 cents. For fiscal 2011, earnings (excluding special items) came in at $5.00 per share, surpassing the Zacks Consensus Estimate of $4.92 and the previous-year earnings of $4.58 per share.

Including expenses associated with the acquisition of US Oncology, earnings for the quarter and the year came in at $1.62 and $4.86 per share, respectively.

Higher revenues and lower share count helped boost earnings.

Revenues for the fourth quarter climbed 8% to $28.9 billion, marginally beating the Zacks Consensus Estimate of $28.5 billion. Full-year 2011 revenues of $112.1 billion was also ahead of the Zacks Consensus Estimate of $111.7 billion and the year-ago revenues of $108.7 billion. The acquisition of US Oncology led the revenue upside.

Quarter in Detail

McKesson operates through two segments: Distribution Solutions and Technology Solutions. Revenues at the Distribution Solutions segment went up 8% to $28.0 billion in the reported quarter.

Revenues from the US pharmaceutical distribution business came in at $25.0 billion, 9% higher than the year-ago figure. The increase was primarily due to market growth and the acquisition of US Oncology. Canadian revenues grew 2% to $2.3 billion, basically reflecting foreign currency impact. Medical-Surgical distribution revenues climbed 5% to $720 million.

Revenues at the Technology Solutions segment scaled up 7% to $876 million during the quarter. Revenues from this segment are derived from services, sale of software & software systems and hardware.

Within the Technology Solutions segment, service revenues increased 5% to $656 million. While software revenues climbed 12% to $181 million, hardware revenues shot up 22% to $39 million in the fourth quarter of 2011.

Gross profit for the quarter went up 11% to $1.8 billion. McKesson reported a 12% increase in operating expenses, incurring $1.1 billion. Higher operating expenses resulted from the acquisition of US Oncology.

Other Details

McKesson completed the acquisition of US Oncology for $2.16 billion in December 2010. Following the acquisition, McKesson combined its Specialty Care Solutions business with US Oncology. We believe that this acquisition will help McKesson expand its specialty services, particularly in oncology.

The company repurchased $2.1 billion of common stock in fiscal 2011, of which $500 million worth of repurchases were made in the fourth quarter.

Moreover, McKesson recently authorized the repurchase of an additional $1 billion of common stock, bringing the total authorization to about $1.5 billion.

Outlook for fiscal 2012

McKesson expects fiscal 2012 earnings (excluding special items) to range between $5.99 and $6.19 per share. The guidance range does not include the 6 cents that the company expects to incur in relation to the US Oncology acquisition.

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

The fiscal 2012 Zacks Consensus Earnings Estimate of $5.63 lies below the company’s guidance range.

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

With a few blockbuster drugs, such as Pfizer Inc.’s (PFE) Lipitor, expected to lose US patent exclusivity in calendar year 2011, the company expects to record robust generic revenues in fiscal 2012.

McKesson expects the US Oncology acquisition to result in a 5% increase in operating expenses in fiscal 2012.

For fiscal 2012, the company expects 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.

Neutral on McKesson

We currently have a Neutral recommendation on McKesson, which is supported by a Zacks #3 Rank (short-term Hold rating). McKesson is a major player in the pharmaceutical and medical supplies distribution market, and we believe that several factors like an 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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