McKesson Banks On Distribution Business Amid Pricing Woes

On Aug 14, we issued an updated research report on San Francisco, CA-based McKesson Corporation (NYSE:MCK) , a health care services and information technology company. McKesson posted disappointing results in first-quarter fiscal 2018, wherein adjusted earnings and revenues missed the Zacks Consensus Estimate. The company currently has a Zacks Rank #3 (Hold).

The quarter saw strong performance by the Distribution Solutions segment. The segment is expected to keep up 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 revenue growth is 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 $7.10-$9.00 for the fiscal ending Mar 31, 2018. Adjusted earnings for the same period are expected in the range of $11.80-$12.50 per diluted share.

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 and its first quarter slightly surpassed expectations.

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

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

Stock Performance and Estimate Revision Trend

Over the last three months, McKesson has been trading above the broader industry. The company has gained 5.1%, comparing favorably with the broader industry’s return of just 4%. The current level is also higher than the S&P 500’s return of only 4.6% over the same time frame.

The estimate revision trend for McKesson has been unfavorable at the moment. For the current quarter, six analysts moved south compared to no movement in the opposite direction over the last two months. As a result, magnitude of full-year estimates fell 4.8% to $2.76 over the same time frame.

Key Picks

A few better-ranked stocks in the broader medical sector are Edwards Lifesciences Corporation (NYSE:EW) , Masimo Corporation (NASDAQ:MASI) and IDEXX Laboratories, Inc. (NASDAQ:IDXX) .

Notably, Edwards Lifesciences sports a Zacks Rank #1 (Strong Buy), while IDEXX Laboratories and Masimo Corporation have a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Edwards Lifesciences has a long-term expected earnings growth rate of 15.2%. Notably, the stock has returned 2.7% over the last three months.

Masimo yielded a strong return of 26.6% year to date. The stock has a long-term expected earnings growth rate of 11.1%.

IDEXX Laboratories has a long-term expected earnings growth rate of 19.8%. Additionally, the stock represents an impressive one-year return of 39.6%.

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