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Why Shares in McKesson Slumped 10% Today

By Todd Campbell - Jan 11, 2016 at 4:29PM

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Investor concerns over narrowing margin led to the drug distributor's shares falling today.

Source: McKesson Corporation

What: After narrowing the range of expected earnings per share for fiscal 2016 and providing a glimpse into its expectations for fiscal 2017, shares in McKesson Corporation (MCK -0.41%) finished the day 10.3% lower.

So what: Downward price pressure on generic and branded drugs distributed to key accounts -- such as CVS Health (CVS -1.24%) -- has resulted in McKesson lowering the top end of its fiscal 2016 EPS guidance to $12.90 from its prior forecast for as much as $13.

Specifically, McKesson expects that fiscal 2016 EPS will be within a range of $12.60 to $12.90, a narrowing of its previously issued guidance for fiscal 2016 EPS of $12.50 to $13.

The company also offered up insight into fiscal 2017, stating that it projects adjusted EPS growth of 3% to 8% from 2016, and it indicated that it has signed a contract to supply drugs to CVS Health's newly acquired Target retail store pharmacies.

Now what: McKesson hopes to offset some of the headwinds tied to pricing with a lower tax rate and share repurchases. In fiscal Q3, McKesson spent $350 million buying back shares and management plans to spend more on repurchases this quarter, too.

Additionally, management is going to be taking a hard look at its expenses in hopes of freeing up more money for the bottom line. Depending on how that review progresses, earnings may benefit from cost-cutting in 2017. For that reason, investors may want to keep close tabs on management's comments as we get deeper into the quarter.

Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. The Motley Fool recommends CVS Health and 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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Stocks Mentioned

McKesson Corporation Stock Quote
McKesson Corporation
$365.86 (-0.41%) $-1.51
CVS Health Corporation Stock Quote
CVS Health Corporation
$103.62 (-1.24%) $-1.30

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