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McKesson Corporation’s (MCK - Analyst Report) fiscal fourth quarter 2014 (ended Mar 31, 2014) earnings of $2.55 per share easily beat the Zacks Consensus Estimate of $2.38 per share and were up 72% from the year-ago quarter.

On a reported basis (including one-time charges), earnings came in at $1.56 per share, up 41% from the year-ago quarter.

Revenues grew 25.0% to $38.1 billion in the fourth quarter of fiscal 2014, surpassing the Zacks Consensus Estimate of $35.2 billion.

Quarter in Detail

McKesson operates through two segments: Distribution Solutions and Technology Solutions.

Revenues from the Distribution Solutions segment increased 25.7% year over year to $37.3 billion in the reported quarter due to strong market growth. Revenues from the pharmaceutical distribution business in North America came in at $31.1 billion, up 9.0% year over year.

Revenues from Medical-Surgical distribution and services surged 28.4% to $1.4 billion due to the addition of PSS World Medical. We note that McKesson closed the acquisition of PSS World Medical Inc. in Feb 2013 and successfully integrated the targets set at the end of the first year.

However, revenues from the Technology Solutions segment were down 1.0% year over year to $809 million due to an expected year-over-year decline in McKesson’s Horizon hospital software business. We remind investors that 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 50.2% in the quarter to $1.8 billion.

Fiscal 2014 Results

Revenues surged 13% to $137.6 billion from fiscal 2013 and beat the Zacks Consensus Estimate of $134.9 billion. Earnings per share were up 31% to $8.35 from fiscal 2013 and beat the Zacks Consensus Estimate of $8.22 per share.

Fiscal 2015 Outlook

McKesson expects earnings (excluding special items) from continuing operations in the range of $10.40 – $10.80 in fiscal 2015. The Zacks Consensus Estimate of $10.43 is well within the management's targeted range. Revenue from Distribution Solutions is projected to increase significantly in fiscal 2015 driven by the acquisition of Celesio. However, revenues from Technology Solutions is estimated to decline modestly as growth in the connectivity and payer-facing businesses will be offset by an expected revenue decline in other areas.

Update on Celesio Acquisition

After a failed bid, McKesson finally managed to secure the acquisition of Celesio earlier in 2014. McKesson launched a tender for the remaining outstanding common shares of Celesio in the fiscal fourth quarter and now has a 76% stake in Celesio. The company anticipates gaining operational control of Celesio in the first half of fiscal 2015.

Our Take

McKesson currently carries a Zacks Rank #3 (Hold). We are impressed by the fiscal fourth quarter beat and positive guidance for 2015. Shares were up 3.28% in after market hours trading.

McKesson has been actively pursuing deals and acquisitions to drive growth. McKesson’s relentless efforts to acquire Celesio were commendable. 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 strong foothold in Europe, thereby geographically expanding its core operations further.

In Feb 2014, McKesson expanded its distribution agreement with Rite Aid Corporation (RAD - Analyst Report). The agreement includes both brand and generic pharmaceuticals. The new agreement spans for five years up to Mar 2019.

Some better-ranked stocks in the broader healthcare sector include Allergan Inc. (AGN - Analyst Report) and Shire (SHPG - Analyst Report). Both carry a Zacks Rank #2 (Buy).

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