McKesson Corporation (MCK) reported third-quarter fiscal 2015 (ended Dec 31, 2014) earnings of $2.89 per share, up from $1.48 in the year-ago quarter, which comfortably beat the Zacks Consensus Estimate of $2.62.
On a reported basis (including one-time charges), earnings came in at $2.01 per share, up from 70 cents in the year-ago quarter. Third-quarter results benefited from a pull-forward of certain brand price increases (9 cents), which were earlier expected in the fourth quarter. Earnings also benefitted from lower-than-expected tax rates, which were driven by the enactment of recent legislations (13 cents).
Revenues grew 36.9% to $47.0 billion in the third quarter of fiscal 2015, surpassing the Zacks Consensus Estimate of $44.6 billion.
The Quarter in Detail
McKesson operates through two segments: Distribution Solutions and Technology Solutions.
Revenues from the Distribution Solutions segment increased 37.9% year over year to $46.2 billion in the reported quarter driven by contribution from the Celesio acquisition and strong market growth.
Revenues from the Pharmaceutical distribution business in North America came in at $37.4 billion, up 16.6% year over year fueled by continuous demand for recently launched drugs for the treatment of hepatitis C, further penetration of generics and market growth. The specialty business also continues to benefit from the strong oncology, ophthalmology and rheumatology businesses.
Revenues from the Medical-Surgical distribution and services increased 7% to $1.5 billion driven by market growth, along with an increase in sales of flu vaccines and supplies compared to the year-ago quarter.
However, revenues from the Technology Solutions segment dropped 7.3% year over year to $755 million due to an expected year-over-year decline in McKesson’s Horizon hospital software business and planned elimination of a product line.
Operating expenses (on an adjusted basis) shot up 61.3% in the quarter to $2.0 billion.
Fiscal 2015 Outlook
McKesson expects earnings (excluding special items) from continuing operations in the range of $10.80–$10.95 (old guidance: $10.50–$10.90) per share in fiscal 2015 driven by strong results.
The Zacks Consensus Estimate of $10.82 per share is well within management's targeted range.
Revenues from the Pharmaceutical distribution business in North America is projected to grown in mid-teens from the prior year on the back of higher-than-planned branded drug sales, which in turn reflect the strong market demand for the hepatitis C drugs. Revenues from Technology Solutions is expected to decline by mid-single digits due to the impact of some large customers delaying certain contracting decisions due to competing business and regulatory priorities.
Our Take
McKesson currently carries a Zacks Rank #3 (Hold). We are impressed by its fiscal third-quarter earnings beat. McKesson’s performance in the first nine months of fiscal 2015 has also been quite impressive.
McKesson has actively pursued deals and acquisitions to drive growth. The company’s relentless efforts to acquire Celesio were commendable. We believe that the Celesio acquisition is a step in the right direction and will allow McKesson to gain a strong foothold in Europe, thereby geographically expanding its core operations. The company secured the operating control of Celesio in Dec 2014 and expects to realize annual synergies between $275 million and $325 million by the end of fiscal 2019.
Some better-ranked stocks in the broader health care sector include AmerisourceBergen Corp (ABC) Cardinal Health (CAH) and Biodel Inc. (BIOD). While Biodel is a Zacks Rank #1 (Strong Buy) stock, the other two carry a Zacks Rank #2 (Buy).
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