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Will Core Distribution Unit Aid McKesson (MCK) Q1 Earnings?

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McKesson Corporation’s (MCK - Free Report) first-quarter fiscal 2019 earnings are scheduled to release on Jul 26, before the market opens. While the quarterly results are likely to drive growth at the core Distribution Solutions segment, its strategic initiatives might boost the bottom line.

However, McKesson’s performance in the fourth quarter of fiscal 2018 lacked luster, with adjusted earnings of $3.49 per share missing the Zacks Consensus Estimate. Revenues came in at $51.63 billion, slightly below the Zacks Consensus Estimate of $51.64 billion but increased 4% at constant currency (cc).

The Zacks Consensus Estimate for first-quarter revenues stands at $53 billion, reflecting year-over-year growth of 3.9%. The same for earnings is pegged at $2.78, mirroring a year-over-year improvement of 13%.

Notably, McKesson has delivered a positive average earnings surprise of 5.2% in the trailing four quarters.

Let’s delve deeper.

McKesson Corporation Price and EPS Surprise

Distribution Solutions to Drive Revenues

Distribution Solutionsis one of McKesson’s key segments, which is engaged in the distribution of branded and generic pharmaceutical drugs along with other healthcare-related products.

In the last reported quarter, the segment was the sole contributor to the company’s worldwide revenues. Total sales from the segment totaled $51.63 billion, up 5% at cc. The Zacks Consensus Estimate for the fiscal first quarter revenues is pegged at $52.37 billion, reflecting a 1.9% rise from the prior-year quarter.

Coming to the geographical analysis of Distribution Solutions, the Zacks Consensus Estimate for North America Pharmaceutical Distribution and Services revenues stands at $44.09 billion, up 2.5% from the year-ago quarter. In the fourth quarter of fiscal 2018, revenues from North America Pharmaceutical Distribution and Services summed $42.73 billion, up 5.1% from a year ago.

Strong Player in the Distribution Market

McKesson is a major player in the pharmaceutical and medical supplies distribution market. Despite weak pricing trends and customer consolidation, the company’s distribution solutions segment has consistently performed well in fiscal 2018. We expect the trend to continue in the quarter to be reported as well.

Notably, this Distribution Solutions segment caters to a wide range of customers and businesses. It stands to benefit from increased generic utilization, inflation in generics driven by several patent expirations in the next few years, and an aging population.

At the end of fiscal 2018, revenues at this unit grew significantly and contributed to the company’s total revenues. This upside was driven by increase in market share and strategic acquisitions.

Upbeat View/Guidance

McKesson declared preliminary results for the first quarter of fiscal 2019 in June. The company projects adjusted earnings per share to be in the range of $2.85-$2.95 in the quarter to be reported.

Furthermore, the company reaffirmed its fiscal 2019 guidance. McKesson expects adjusted earnings per share to be in the $13.00-$13.80 band. The Zacks Consensus Estimate is pegged at $13.33, which lies within the guidance. Per management, the fiscal 2019 outlook represents mid- to high-single digit percentage growth year over year, indicating stable market conditions.

Free cash flow is expected at around $3 billion. The guidance projects full-year adjusted tax rate in the range of 21-23%, which may vary from quarter to quarter (read more: McKesson Issues Strong Preliminary Results for Q1).

Earnings Whispers

Per our proven model, a stock needs to have a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to deliver a positive earnings surprise in the fiscal first quarter. This is the case here as you will see below.

Zacks ESP: McKesson has an Earnings ESP of +3.95%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: McKesson carries a Zacks Rank #3, which increases the predictive power of ESP.

Please note that we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revision.

Stocks Worth a Look

Here are a few medical stocks worth considering as they have the right combination of elements to post an earnings beat this quarter.

AmerisourceBergen Corp. (ABC - Free Report) has an Earnings ESP of +0.34% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Bio-Rad Laboratories (BIO - Free Report) has an Earnings ESP of +7.41% and a Zacks Rank of 2.

DaVita Inc. (DVA - Free Report) has an Earnings ESP of +4.97% and a Zacks Rank #2.

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