Why Is McKesson (MCK) Up 0.1% Since Last Earnings Report?

It has been about a month since the last earnings report for McKesson (MCK). Shares have added about 0.1% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is McKesson due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

McKesson Q3 Earnings Beat Estimates, Revenues Miss

McKesson Corporation’s reported third-quarter fiscal 2020 earnings of $3.81 per share, which beat the Zacks Consensus Estimate of $3.54 per share by 7.6%. Further, the bottom line improved 12.1% on a year-over-year basis.

Revenues came in at $59.17 billion, which missed the Zacks Consensus Estimate by 0.4%. However, the figure improved 5.3% year over year.

Q3 Segmental Analysis

Revenues at the U.S. Pharmaceutical and Specialty Solutions segment totaled $46.92 billion, up 6% year over year. Per management, the upside was primarily driven by branded pharmaceutical price increases and higher volumes from retail national account customers. However, branded to generic conversions partially offset the upside.

At the European Pharmaceutical Solutions segment, revenues amounted to $6.93 billion, up 0.3% year over year. Further, the metric rose 3% at constant currency (cc) on the back of growth in the pharmaceutical distribution business.

Revenues at the Medical-Surgical Solutions segment totaled $2.14 billion, up 6.4% year over year. Growth in the Primary Care business, driven by higher volume of pharmaceutical products and an early start to influenza season, drove the upside.

Revenues at the Other segment were $3.18 billion in the fiscal third quarter, improving 5.7% year over year and 5% at cc. Growth in the Canadian business primarily contributed to the upside.

Margins

Gross profit in the reported quarter was $3.03 billion, up 2.1% on a year-over-year basis. Meanwhile, gross margin was 5.1% of net revenues, down 20 bps.
Operating income in the quarter was $360 million, which plunged 47.3% from the year-ago quarter figure of $683 million.

The U.S. Pharmaceutical and Specialty Solutions segment reported adjusted operating profit of $658 million, up 11% from the prior-year quarter. Adjusted operating margin was 1.4% at the segment.

Adjusted operating profit at the European Pharmaceutical Solutions segment amounted to $80 million, up 16% from the year-ago quarter. Meanwhile, the adjusted operating margin at the segment was 1.2%.

The Medical-Surgical segment had adjusted operating profit of $184 million, which improved 8% from the year-ago quarter. Adjusted operating margin was 8.6% at the segment.

Adjusted operating profit was $214 million at the Other segment, down 4% from the prior-year quarter.

Financial Update

In the quarter under review, cash and cash equivalents came in at $2.07 billion, up 52.3% sequentially.

Cash flow from operating activities for the nine months ended as of Dec 31, 2019, came in at ($280) million, against the year-ago quarter figure of 141 million.

Fiscal 2020 Guidance Reiterated

McKesson has reiterated fiscal 2020 guidance (announced Jan 13, 2020). For fiscal 2020, the company projects adjusted earnings per share in the range of $14.60-$14.80.

Company Updates

On Dec 12, 2019, McKesson and Walgreens Boots Alliance (NASDAQ:WBA) announced an agreement to form a joint venture (JV) that is anticipated to combine their respective pharmaceutical wholesale businesses in Germany.

On February 4, 2020, McKesson’s wholly-owned subsidiary, PF2 SpinCo, Inc., filed a registration statement with the Securities and Exchange Commission (SEC) with regards to a potential exit of the company from its investment in the Change Healthcare JV.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month.

VGM Scores

At this time, McKesson has a subpar Growth Score of D, however its Momentum Score is doing a lot better with an A. Following the exact same course, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, McKesson has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.