Balanced View on McKesson

We are maintaining our Neutral recommendation on McKesson Corporation ( MCK - Analyst Report ) with a target price of $90.00. The stock carries a Zacks #3 Rank (Hold rating) in the short run.

McKesson delivered a mixed performance in the first quarter of fiscal 2013 (ended June 30, 2012). McKesson’s first quarter fiscal 2013 adjusted earnings of $1.55 per share surpassed the Zacks Consensus Estimate of $1.49 per share. Also, the reported quarter’s adjusted earnings spiked 22% from the year-ago period driven by higher revenues and lower share count. Revenues climbed 3% to $30.8 billion. Revenues were, however, short of the Zacks Consensus Estimate of $31.05 billion.

McKesson continues to expect fiscal 2013 earnings (excluding special items) in the range of $7.05 - $7.35 share. The company expects to generate cash flow from operating activities in the range of $2.0 - $2.5 billion for fiscal 2013.

We note that McKesson has announced two deals recently to expand further. In a bid to accelerate its expansion into high potential markets and improve its services, McKesson announced earlier in the month that it will purchase Pittsburgh based health care management and technology service company, Med3000. The terms of the deal, expected to close in the next few months, were not disclosed. The deal should boost the medical billing and practice management services of the revenue management solutions system at McKesson, apart from facilitating its expansion into the high potential markets.

Moreover, on September 24, 2012, McKesson announced that it has inked a definitive agreement to acquire MedVentive, which offers services to health systems, multi-specialty clinics and payers in the US. Through this deal, McKesson aims to improve its efficiencies while reducing costs. The financial terms of the deal were not disclosed.

The impending acquisition aims to enable providers to efficiently manage the clinical health of at-risk patient populations. McKesson intends to attain this objective by identifying gaps in patient care apart from providing appropriate information to doctors. Both impending acquisition are in line with the company’s Better Health 2020 strategy. The strategy is aimed at better utilization of information technology in the field of healthcare.

We are concerned about McKesson’s dependence on a small number of customers for a significant portion of its revenues. During fiscal 2012, McKesson’s ten largest customers accounted for 52% of its total revenue. The two largest customers, CVS Caremark ( CVS - Analyst Report ) and Rite Aid Corporation ( RAD - Analyst Report ) , accounted for 16% and 10% of total revenue, respectively.