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Good Times Are Here Again for McKesson

By Dan Caplinger - Jul 31, 2019 at 5:31PM

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The drug distributor got off to a great start in its new fiscal year.

Drug distribution and wholesale specialist McKesson ( MCK -0.79% ) has had to deal with plenty of concerns surrounding its core business. As Washington politicians consider reforms that could fundamentally change the way that McKesson and its peers operate, investors have had to weigh the possibilities of legislative and regulatory action against the potential profits of the company's current business model if it's allowed to continue.

Coming into Wednesday's fiscal first-quarter financial report, McKesson investors were hoping to see the company keep up some momentum in its modest recent growth. The drug distributor outpaced many investors' expectations, and it's optimistic that it can get through current challenges and emerge stronger than ever.

Wood-framed metal sign saying McKesson Ventures

Image source: McKesson.

McKesson's growth is back

McKesson's fiscal first-quarter results got the new year off to a good start. Revenue climbed 6% to $55.7 billon, dramatically accelerating from its slower pace of growth in the previous quarter. Adjusted net income of $625 million was also up by 6% from a year ago, and the resulting adjusted earnings of $3.31 per share dramatically exceeded the $3.01-per-share consensus forecast of analysts following the stock.

Geographically, McKesson's strength was in its domestic operations, as currency impacts exacerbated international challenges. Segment revenue in U.S. pharmaceutical and specialty solutions climbed 8%, as conversions from branded drugs to generics had only a minimal negative influence on natural sales growth in the market. Adjusted operating profit for the unit climbed at double-digit percentage rates.

In Europe, things weren't as good. Segment revenue was down 3%, but the business faced 6 percentage points of downward pressure from the strong U.S. dollar, taking away what would've been 3% sales growth on a currency-neutral basis. However, adjusted operating profit took a 50% hit, as the weak retail-pharmacy industry in the U.K. market weighed on McKesson's results internationally.

McKesson kept getting great results from its medical-surgical solutions segment. Sales climbed 12%, and adjusted operating profit soared 27% from year-ago levels.

CEO Brian Tyler had positive things to say about the period. "McKesson is off to a strong start in fiscal 2020," he said, "and our first-quarter earnings performance exceeded our expectations." The company also noted that those strong results gave its executives confidence about the near-term future.

McKesson sees better times ahead

That optimism spilled over into McKesson's guidance for the remainder of the fiscal year. Tyler believes that the company has generated "momentum from our first-quarter results" and "confidence in the full year outlook," and the net result was an upgrade to the company's previous guidance.

Specifically, McKesson increased its expectations for adjusted earnings dramatically. The drug distributor now expects to see the bottom line come in between $14.00 and $14.60 per share, which is up $0.55 to $0.95 per share from its previously provided range.

McKesson also rewarded its shareholders with a bit more return of capital, to go with the extensive share buybacks that it's been doing lately. The company decided to boost its quarterly dividend by $0.02 per share to $0.41. That won't do a whole lot to boost the stock's relatively low yield, kicking it up to around 1.2%. Yet combined with extensive share repurchases, it's still a sign that McKesson has its investors in mind when making capital decisions.

McKesson investors were comfortable with the news, and the stock climbed about 2% in after-hours trading following the announcement. Regulatory and legislative risks aren't over for the pharmaceutical industry, and drug distribution might yet see major restructuring. For now, though, investors are happy with what they see from McKesson, and there's reason for optimism that the distributor will find ways to sustain its business model, even if Washington seeks to make things a bit more difficult for the industry as a whole.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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