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Why Is McKesson (MCK) Up 8.9% Since Last Earnings Report?

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Zacks Equity Research
·4 min read
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A month has gone by since the last earnings report for McKesson (MCK). Shares have added about 8.9% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is McKesson due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

McKesson Q2 Earnings and Revenues Surpass Estimates

McKesson Corporation reported second-quarter fiscal 2021 adjusted earnings per share of $4.80, which beat the Zacks Consensus Estimate of $3.87 per share by 24%. The bottom line also improved 33.3% on a year-over-year basis.

Revenues of $60.81 billion outpaced the Zacks Consensus Estimate by 2.5%. Further, the top line rose 5.5% year over year.

Q2 Segmental Analysis

Per McKesson’s segment realignment effective in the quarter under review, the reporting is as follows:

Revenues at the U.S. Pharmaceutical and Specialty Solutions segment were $48.07 billion, up 5.4% year over year. Per management, the upside was primarily driven by market growth and increase in volumes from retail national account customers. However, branded to generic conversions partially offset the upside.

At the International segment, revenues amounted to $9.54 billion, up 2.3% year over year. However, the metric decreased 1% at constant currency (cc) due to lower volumes in the Canadian pharmaceutical distribution business resulting from the exit of an unprofitable customer at the start of fiscal 2021. However, rise in volumes in the European business partially mitigated this downside.

Revenues at the Medical-Surgical Solutions segment totaled $2.53 billion, up 23.2% year over year. Higher demand for COVID-19 tests and personal protective equipment (PPE) in the Primary Care and Extended businesses contributed to the upside.

Revenues at the Prescription Technology Solutions segment totaled $668 million, up 6.7% year over year. New brand support programs led to the improvement, partially offset by the effect of decline in prescription volume trends.

Margins

Gross profit in the reported quarter was $3 billion, up 4.6% on a year-over-year basis. Meanwhile, gross margin accounted for 4.9% of net revenues, remaining flat from the prior-year quarter.

Operating income in the quarter was $634 million, up 1.3% from the year-ago quarter. Operating margin was 1% of net revenues, down 10 basis points (bps) from the year-ago quarter.

The U.S. Pharmaceutical and Specialty Solutions segment reported adjusted operating profit of $658 million, up 3% from the prior-year quarter. Adjusted operating margin was 1.4% at the segment.

Adjusted operating profit at the International segment was $116 million, up 20% from the year-ago quarter. Meanwhile, the adjusted operating margin at the segment was 1.2%.

The Medical-Surgical segment had adjusted operating profit of $210 million, which increased 27% from the year-ago quarter. Adjusted operating margin was 8.3% at the segment.

Adjusted operating profit was $104 million at the Prescription Technology Solutions segment, down 10% from the prior-year quarter. Adjusted operating margin was 15.6% at the segment.

Financial Update

In the quarter under review, cash and cash equivalents were $3.09 billion, down 18.4% sequentially.

Cumulative cash used in operating activities for the fiscal second quarter amounted to $41 million, narrower than from $159 million in the year-ago period.

Fiscal 2021 Guidance Raised

For fiscal 2021, McKesson projects adjusted earnings per share to be $16.00-$16.50 (up from the previously guided range of $14.70-$15.50). The Zacks Consensus Estimate for the same is pegged at $15.13.

The abovementioned guidance assumes around 15-20 cents of adjusted EPS associated with the kitting and storage of ancillary supplies for future COVID-19 vaccines.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates review.

VGM Scores

At this time, McKesson has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, McKesson has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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