Yet Another Earnings Beat from McKesson
McKesson Corporation’s (MCK) second quarter of fiscal 2014 (ended Sep 30, 2013) earnings (excluding special items) of $2.27 per share was up 18.8% from the year-ago quarter.
Excluding special items but including amortization expense, earnings came in at $2.08 per share, up from $1.79 per share in the year-ago quarter. The Zacks Consensus Estimate was $2.03 per share.
Revenues grew 10.7% to $32.9 billion in the second quarter of fiscal 2014, marginally surpassing the Zacks Consensus Estimate of $32.4 billion.
Quarter in Detail
McKesson operates through two segments: Distribution Solutions and Technology Solutions.
Revenues at the Distribution Solutions segment increased 10.8% year iover year to $32.2 billion in the reported quarter due to strong market growth across pharmaceutical direct distribution and services. Revenues from the U.S. pharmaceutical distribution business came in at $28.1 billion, up 9.0% year over year.
Revenues from Canada were up 9.3% to $2.6 billion driven by market growth and new customer wins.
Revenues from Medical-Surgical distribution and services surged 68.0% to $1.5 billion due to the addition of PSS World Medical. We note that McKesson closed the acquisition of PSS World Medical Inc. in Feb 2013.
Revenues at the Technology Solutions segment were up 7.7% year over year to $785 million driven by growth in services (+12.0%), partially offset by a decline in software revenues (-9.0%). The company streamlined operations in this segment and sold its international technology and hospital automation businesses during the fiscal first quarter.
Operating expenses (on an adjusted basis) climbed 23.3% in the reported quarter to $1.2 billion.
Fiscal 2014 Outlook Upped Again
On the back of solid results in the first half of fiscal 2014, McKesson now expects earnings (excluding special items) from continuing operations in the range of $8.40 – $8.70, up from the earlier estimate of $8.05 - $8.35 per share. The Zacks Consensus Estimate of $8.29 is much below the low end of the company’s raised guidance.
Celesio Acquisition
McKesson also announced that it has signed an agreement to acquire a majority stake in Germany-based drug distribution company Celesio for approximately $8.3 billion. We remind investors that the rumors of the acquisition have been doing the rounds since early Oct 2013 and an announcement was expected with the earnings results.
The offer price represents a 39% premium over the three-month volume weighted average price prior to Oct 8, 2013. The combined group is expected to have annual revenues in excess of $150 billion.
McKesson expects to realize annual synergies between $275 million and $325 million by the fourth year of obtaining operational control of Celesio.
Our Take
The second quarter beat does not surprise us. We are also encouraged by the company’s upbeat performance in the fiscal first half, subsequent increase in guidance and the recently announced Celesio acquisition. Shares were up in pre-market trading.
Given the company’s broad portfolio and accretion from recent acquisitions, McKesson is likely to achieve its updated guidance.
McKesson has a history of successful acquisitions. We believe the Celesio acquisition is a step in the right direction and will allow McKesson to gain a foothold in Europe, thereby geographically expanding its core operations further. However, given the size and stature of the Celesio acquisition, funding for the acquisition along with integration of operations will be a matter of concern for McKesson.
We note that rival AmerisourceBergen (ABC) entered into a strategic ten-year pharmaceutical distribution agreement with Walgreen (WAG) and Alliance Boots GmbH earlier in 2013.
McKesson currently carries a Zacks Rank #2 (Buy). Right now, Cardinal Health (CAH) also looks attractive with a Zacks Rank #1 (Strong Buy).
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