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Monday, June 1, 1999

McKesson HBOC, Inc.
Website: www.mckhboc.com
Phone:  415-983-8300
Price  (5/28/99): $34 1/16


McKesson HBOC started trading as a new company in mid-January after the $14 billion merger of McKesson and HBO & Company was finalized. With excitement about the new healthcare conglomerate running rampant, the shares ran as high as $89 in fairly short order. Unfortunately for shareholders, the stock has been anything but healthy since those heady days in January.

February and March saw McKesson's share price flounder even as news of several new contracts and significant insider buying hit the wires. But whatever good news was released was to be vastly eclipsed by what the company announced on April 28. On that fateful day McKesson HBOC let the world know that the earnings it had released six days earlier were to be restated downward. Forward profit guidance was watered down, too. The day before that announcement the stock closed trading at $65.75, but after an amazing day where 41.6 million shares changed hands, McKesson ended at $34.50. A whopping 47.5% of the stock's value and $9.2 billion worth of the company's market capitalization vanished into thin air in one day.

Needless to say, the company's restated financial results have brought an avalanche of class action lawsuits from irked shareholders. But even worse was to come on May 25 when many of the McKesson faithful were left with an eerie feeling of d�j� vu. The company announced on that day that the financial results would be restated even further downward than what it anticipated a month earlier. While the damage to the stock price from the second round of earnings restatements has been relatively minor, longtime shareholders must still be left with a rather sickening feeling.


Based in San Francisco, McKesson HBOC is the largest distributor of pharmaceutical products in the United States and Canada. The company is also among the biggest players in the healthcare information industry, providing data management services to a wide variety of hospitals, clinics, and insurance agencies.

McKesson HBOC is also the nation's third largest distributor of bottled water, but the water business represents less than 1% of the company's total sales.

The company was formed by the 1998 merger of McKesson and HBO & Company. McKesson's primary business was drug distribution while the information technology sector of the new company came from the old HBO & Company.

McKesson HBOC is a component of the S&P 500 index and is also a member of the Fortune 100.


(*Results are in the process
of being audited and restated)
Income Statement
12-month sales:     $30,628.1 million 
12-month income:       $589.5 million**
12-month EPS:            $2.06**
Profit Margin:            1.9%
Market Cap:          $9,925.8 million 
(**Excludes special charges)

Balance Sheet (12/31/98)
Cash:                  $124.0 million
Current Assets:      $5,530.0 million
Total Assets:        $7,439.7 million
Current Liabilities: $4,188.0 million 
Long-term Debt:      $1,142.2 million 
Total Liabilities:   $5,759.0 million

Price-to-earnings:   16.5    
Price-to-sales:           0.3


Given that the drop in the stock price after the first earnings restatement was so dramatic, it's safe to say that few (if any) outside the company saw the trouble coming. Individual investors simply aren't privy to the types of discussions that go on between companies and their auditors. Nevertheless, this whole episode proves how important it is to invest in companies and managements that can be trusted.

Since most of the accounting problems seem to stem from the old HBO & Company, investors who have been tuned in on the action in the enterprise computing arena would have seen that the sector has been anything but healthy. Other recent Troubles such as Baan (Nasdaq: BAANF) and Network Associates (Nasdaq: NETA) have seen new software business dry up ahead of organizations "locking down" until the Y2K bug has been flushed out of their systems.

Another problem for the individual investor looking at McKesson is the fact that the company's products serve a specialized sector of the healthcare industry, and many simply are not familiar with the company's products and services. It's generally a good idea to stay within one's circle of competency.


Sometimes it is just as important to look at the people who are running the company as it is the products it is selling. McKesson's credibility on Wall Street has essentially been taken out and shot, and rebuilding trust within the investment community will be anything but an easy task for management. Until that trust can be rebuilt, it is highly unlikely the company will command anything but a low valuation.

It's also important to look at what has caused the earnings restatements in the first place. Revising past results is often a sign that perhaps the conditions for a company's products weren't as strong as expected. If the company is to grow earnings at a 25% annual clip, it will need to reignite demand and growth for its software and services. Only time will tell how healthy the healthcare software business will be.

Even with all this negativity, there may be some value here since Wall Street has exacted a fairly severe punishment on the stock. If the company can meet its revised earnings estimates, the stock is trading at a forward P/E ratio in the mid-teens, well below where most large-capitalization stocks are trading today. Nevertheless, it is going to be a long and difficult road to recovery for McKesson HBOC.

-- Paul Larson (TMFParlay@aol.com)

Make a Living Foolin' Around.

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