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McKesson Gains From Distribution Business Amid Pricing Woes

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On Nov 20, we issued an updated research report on San Francisco, CA-based McKesson Corporation (MCK - Free Report) , a health care services and information technology company.

In the past month, McKesson has been trading below the industry. The stock has shed 6.8%, as against the industry’s gain of 0.4%. The company continues to witness strong growth in pharma and biotech backed by solid market fundamentals and planned growth strategy.

 

 

McKesson delivered stable results in the recently reported second-quarter fiscal 2018, wherein adjusted earnings and revenues missed the Zacks Consensus Estimate. The quarter witnessed strong performance by the Distribution Solutions segment. The segment is expected to remain consistent with its performance in fiscal 2018 despite weak pricing trends and customer consolidation. To boost growth, the company recently acquired CoverMyMeds for approximately $1.1 billion.

Coming to guidance, the Distribution Solutions business revenues are expected to witness robust growth on a year-over-year basis. The upside is expected to be driven by market growth and acquisitions. McKesson expects GAAP earnings per diluted share of $4.80 to $6.90 for the fiscal year ending Mar 31, 2018. Adjusted earnings for the same fiscal are projected in the range of $11.80-$12.50.

On the flipside, pricing pressure in the independent retail pharmacy channel is a headwind. McKesson entered fiscal 2018 with an assumption of branded inflation in the mid-single digits. The first-quarter results slightly surpassed expectations.

McKesson has been witnessing increased price competition in the independent retail pharmacy channel, which resulted in reduced volumes. The company continues to witness a competitive market for selling generic pharmaceuticals in the United States. However, it expects to overcome the independent pharmacy sell-side pricing impact by the end of second-quarter fiscal 2018.

Cutthroat competition in the niche markets, currency headwinds and reimbursement issues remain challenges.

Zacks Rank & Key Picks

McKesson carries a Zacks Rank #4 (Sell).

A few better-ranked medical stocks are PetMed Express, Inc. (PETS - Free Report) , Align Technology, Inc. (ALGN - Free Report) and Myriad Genetics, Inc. (MYGN - Free Report) . PetMed, Align Technology and Myriad Genetics sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

PetMed has a long-term expected earnings growth rate of 10%. The stock has rallied roughly 76.6% in a year.

Align Technology has a long-term expected earnings growth rate of 28.9%. The stock has gained 163.9% over a year.

Myriad Genetics has a long-term expected earnings growth rate of 15%. The stock has gained 91.6% in a year.

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