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McKesson Corporation’s (MCK - Analyst Report) first quarter of fiscal 2014 (ended Jun 30, 2013) earnings of $2.07 per share (excluding special items) were up 34.4% from the year-ago quarter. The Zacks Consensus Estimate was $1.74 per share.

On a reported basis, earnings came in at $1.83 per share, up from $1.58 per share in the year-ago quarter.

Revenues grew 4.9% to $32.2 billion in the first quarter of fiscal 2014 but were marginally short of 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 4.8% to $31.4 billion in the reported quarter. Revenues from the U.S. pharmaceutical distribution business came in at $27.5 billion, up 3.1% year over year due to strong growth across genericpharmaceuticals driven by favorable pricing in the quarter. 

Revenues from Canada were up 1.9% to $2.6 billion driven by new customers signed in the previous fiscal year.

Revenues from Medical-Surgical distribution and services surged 71.0% to $1.3 billion due to the addition of PSS World Medical. McKesson closed the acquisition of PSS World Medical Inc. in Feb 2013.

Revenues at the Technology Solutions segment were up 8.9% year over year to $805 million driven by growth in services (11.2%) and software revenues (4.2%). The company streamlined operations in this segment and sold its international technology and hospital automation businesses during the reported quarter.


Operating expenses (on an adjusted basis) climbed 17.6% in the reported quarter to $1.2 billion.

Concurrent with the first quarterly results, McKesson announced a 20% increase in its quarterly dividend, which now stands at 24 cents. During the fiscal first quarter, McKesson repurchased shares worth $127 million and still has $340 million remaining as on Jun 30, 2013.

We believe that the buyback program and increase in dividends highlights the company’s commitment to create value for shareholders.

Fiscal 2014 Outlook Upped

On the back of solid results in the first quarter of fiscal 2014, McKesson now expects earnings (excluding special items) from continuing operations in the range of $8.05 – $8.35, up from the earlier estimate of $7.90 – $8.20 per share.  The Zacks Consensus Estimate of $8.07 is toward the lower end of the company’s increased guidance.

McKesson anticipates revenues in Distribution Solutions to rebound significantly in fiscal 2014 from the previous fiscal year due to slowing of brand-to-generic conversions and strong demand from existing customers.

We are encouraged by the company’s upbeat performance in the fiscal first quarter, subsequent increase in guidance and in its quarterly dividend. Given the company’s broad portfolio and accretion from recent acquisitions, we believe McKesson will achieve its updated guidance.

McKesson currently carries a Zacks Rank #2 (Buy). Other stocks that look equally attractive include CVS Caremark Corporation (CVS - Analyst Report), GNC Holdings Inc. (GNC - Snapshot Report) and BioScrip Inc. (BIOS - Analyst Report).

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