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McKesson Earnings Shoot Higher As 2016 Prospects Look Healthy

By Dan Caplinger - Jul 29, 2015 at 5:25PM

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The drug wholesaler continued its string of strong performances, with 9% sales growth and a dividend increase.

Image: McKesson.

Drug-wholesale specialist McKesson (MCK 0.64%) has done a superb job of tapping into the positive trends in the U.S. economy, with demographics and healthcare advances both leading to widespread growth in drug demand. Coming into Wednesday afternoon's fiscal first-quarter financial report, McKesson investors hoped that the company could continue its streak of success, and in its results, McKesson posted better than expected figures on both the top and bottom lines. Let's look more closely at McKesson's most recent quarterly results and why the company is optimistic about its growth prospects for 2016 and beyond.

McKesson looks healthier than ever
The strength of McKesson's fiscal first-quarter results looked familiar to those who've followed the stock for a while. Sales rose by 9% to $47.5 billion, more than doubling the 4% growth rate that most investors were expecting to see from the company. On the earnings front, GAAP net income from continuing operations soared 43% to $576 million, and after accounting for various extraordinary items, adjusted earnings of $3.14 per share were up 27% from year-ago levels and crushed the consensus estimate for $2.91 per share.

Just as we've seen in previous quarters, McKesson's two major business segments had very different results. The company's Distribution Solutions remained the growth driver for the overall business, with the segment posting sales growth of 10% even after taking a three percentage point hit from adverse currency movements. North American results for the segment were the best, with a 15% rise in revenue reflecting growth in the market and a more favorable mix of business. Internationally, foreign currency weakness led to a 17% sales hit, but even taking that into account, international revenue was flat on a constant-currency basis. Adjusted operating profit for the segment rose 14%.

Meanwhile, the Technology Solutions business continued to struggle. Revenue fell 4%, with the company citing an expected drop in its hospital-software business. Still, McKesson said that growth in other technology areas helped reduce the blow, and theunit still produced adjusted operating profits of $167 million for the quarter.

CEO John Hammergren expressed optimism about the results. "McKesson's first quarter results represent a good start to the fiscal year," Hammergren said, "driven by solid execution across both segments." The CEO was also pleased with the company's efforts to enhance shareholder value.

How McKesson can grow from here
In particular, McKesson gave investors two reasons for optimism. First, the company raised its quarterly dividend by 17% to $0.28 per share, and although the impact of the move is minimal given the company's 0.4% dividend yield, it nevertheless reflected an awareness that McKesson needs to consider returning capital to shareholders as a key plank of its strategy.

More importantly, McKesson subsidiary Celesio announced plans to acquire the U.K. pharmacy operations of Sainsbury. The move will add more than 280 new pharmacy locations to the Lloyd's Pharmacy brand in the U.K. and help extend McKesson's growing network of pharmacies, which now number more than 12,000 worldwide.

Investors also got good news from an upgrade to McKesson's guidance. The company now expects to see adjusted earnings of $12.36 to $12.86 per share, which is $0.16 per share higher than the previous range. McKesson said that the new guidance reflects the sale of its nurse triage business.

McKesson shareholders didn't react all that strongly to the results, with the shares climbing just a fraction of a percent in the first hour of after-market trading following the announcement. Still, with its long-term strategy in place, McKesson seems well-poised to see ongoing gains in revenue and earnings, and as long as the company remains on its current trajectory, investors will likely share in its long-term success for the foreseeable future.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends McKesson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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