McKesson (MCK) Q1 Earnings: Stock Likely To Beat?

McKesson Corporation (NYSE:MCK) is scheduled to report first-quarter fiscal 2017 results on Jul 27, after the market closes.

The company has beaten estimates in three out of the last four quarters with an average earnings surprise of 0.45%. Let's see how things are shaping up for this announcement.

Factors Influencing This Quarter

McKesson is a major player in the pharmaceutical and medical supplies distribution market. The company’s distribution solutions segment recorded steady growth on the back of a robust performance of the U.S. pharmaceutical business over the last few quarters.

Although the company faced challenges related to a shift in generic pharmaceutical pricing trends and customer consolidation in the pharmaceuticals business in the U.S., McKesson expects the business to perform strongly. In Jun 2016, management raised its fiscal 2017 guidance due to the early adoption of Accounting Standards Update 2016–09, as released by the Financial Accounting Standards Board. The standards primarily relate to stock-based compensation.

The company also updated its guidance to reflect the impact of foreign currency exchange effects, related particularly to the British pound sterling-denominated activities following the UK’s exit from the European Union. The company continues to expect growth in the high single digits at the Distribution Solutions segment driven by market expansion and acquisitions in fiscal 2017.

On a constant currency basis, the pharmaceutical distribution and services business in North America is projected to grow in the high single digits as well, while international Pharmaceutical distribution and services revenues witness low double-digit growth. Revenues at the Medical-Surgical distribution and services division are projected to grow in the mid-single digits.

The company acquired Biologics and Vantage Oncology in Apr 2016 in a bid to expand specialty pharmaceutical distribution, oncology-focused pharmacy offerings, and solutions for manufacturers and payers.

In Jan 2016, McKesson undertook a review of its cost structure and planned to realign its business model for better efficiency, value and innovation.

On the other hand, McKesson collaborated with Change Healthcare Holdings to create a new healthcare information technology company. McKesson will offer majority of its Technology Solutions businesses for the new company. It will, however, retain RelayHealth Pharmacy and Enterprise Information Solutions.

McKesson’s Technology Business has been facing challenging conditions for quite some time now as revenues continued to decline. Hence, a spin-off of the business was around the corner as the company was looking to focus on its core distribution business. The company is also evaluating strategic alternatives for its Enterprise Information Solutions business.

What Our Model Indicates

Our proven model shows that McKesson is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), #2 (Buy) or #3 (Hold) to be able to beat estimates and McKesson has the right mix.

Zacks ESP: The Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is +1.20%. This is because the Most Accurate estimate is pegged at $3.38, while the Zacks Consensus Estimate stands at $3.34.

Zacks Rank: McKesson currently carries a Zacks Rank #2. The combination of McKesson’s favorable Zacks Rank and positive ESP makes us reasonably confident of a positive surprise this season.

Conversely, we caution against Sell-rated stocks (#4 or #5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are some companies you may want to consider as our model shows that they have the right combination of elements to post an earnings beat this quarter:

Ironwood Pharmaceuticals (NASDAQ:IRWD) has an Earnings ESP of 13.3% and a Zacks Rank #2. The company is expected to report earnings on Aug 4.

Bristol-Myers Squibb Co. (NYSE:BMY) has an Earnings ESP of +1.49% and a Zacks Rank #1. The company is scheduled to report second-quarter results on Jul 28.

Exelixis, Inc. (NASDAQ:EXEL) has an Earnings ESP of 3.70% and a Zacks Rank #3. The company is scheduled to report results on Aug 3.