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McKesson (MCK) Q4 Earnings: Will the Stock Disappoint?

Zacks Equity Research

McKesson Corporation MCK, one of the largest healthcare services providers, is scheduled to report fourth-quarter fiscal 2017 results on May 18.

McKesson’s track record has not been impressive, with the company missing estimates in two of the trailing four quarters. In the last reported quarter, it delivered a positive earnings surprise of 2.71%. However the four-quarter average surprise is -3.84%. Let’s see how things are shaping up prior to this quarter.

Pricing War to Impact Results This Quarter

McKesson has been facing challenging conditions over the last few quarters owing to lower generic launches, pricing challenges and customer transitions. The company expects performance to be affected by softness in pricing of drugs. Not only did the company experience fewer drugs with price increases, it also suffered much lower rates of price increases compared with fiscal 2016.

Customer consolidation in the industry has resulted in further losses for the company. Fewer generic launches also affected business. Consequently, McKesson expects branded pharmaceutical pricing trends to be below than those experienced in fiscal 2016. In particular, competitive pricing is hurting the pharmaceutical distribution business in the U.S.

Moreover, reimbursement cuts imposed by the U.K. government to retail pharmacy rates as well as U.K's decision to exit the EU has unfavorably impacted Celesio's operating performance. Accounting for the competitive customer pricing and softness in brand inflation, McKesson projects its earnings for fiscal 2017 in the range of $9.80 to $10.30. Revenues from Distribution Solutions are projected to grow in the mid single digits. However, revenues from Technology Solutions are expected to be down slightly on a year-over-year basis.

McKesson Corporation Price and EPS Surprise


McKesson Corporation Price and EPS Surprise | McKesson Corporation Quote

What Our Model Indicates

Our proven model does not conclusively show that McKesson will beat on earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to be able to beat estimates. Unfortunately, that is not the case here, as you will see below.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at $3.04. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: McKesson carries a Zacks Rank #4 (Sell) which decreases the predictive power of ESP. Also, the company’s ESP of 0.00% makes surprise prediction difficult.

We caution against stocks with a Zacks Ranks #4 or 5 (Strong Sell) going into the earnings announcement, especially when the company is seeing negative estimate revision.

Stocks That Warrant a Look

Here are some companies you may want to consider instead as our model shows that they have the right combination of elements to post an earnings beat:

Best Buy Co. Inc. BBY has an Earnings ESP of +12.50% and a Zacks Rank #3. On average, the stock delivered a positive surprise of almost 27.70% in the last four quarters.

Global Partners LP GLP delivered a positive surprise of almost 96.55% in the trailing four quarters. It has an Earnings ESP of +233.33% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Raymond James Financial, Inc. RJF has an Earnings ESP of +3.45% and a Zacks Rank #1. The stock delivered a positive surprise of almost 14.4% in the trailing four quarters.

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