It's been a rough year for drug distribution companies, such as McKesson (NYSE:MCK) and Cardinal Health (NYSE:CAH). The industry is undergoing wrenching change -- and investors have fled.
But, at some point, a sector reaches bargain-basement prices. Fool contributor W.D. Crotty indicated this in a recent piece.
JP Morgan (NYSE:JPM) had the same sentiment last week, when analyst Lisa Gill upgraded McKesson to "overweight" from "neutral." Of course, the stock surged on the news, increasing $2.00 to $24.98.
Investors, in fact, were expecting only negatives from McKesson's earnings report last week. For the company's second quarter, revenues increased 19% to $19.9 billion compared with the same period a year ago. Earnings came in at $86 million, which was down from $157 million in last year's second quarter.
Unfortunately, McKesson lowered its full-year guidance to $2.00 to $2.20 per share compared with $2.20 to $2.35 per share.
However, the company got traction with a new deal with Department of Veterans Affairs. Moreover, there was growth from the acquisition of AdvancePCS.
The big fear for investors is that drug distribution is a dinosaur of a business. Won't manufacturers, such as Pfizer (NYSE:PFE) and Merck (NYSE:MRK), go direct to customers? On the conference call, the CEO of McKesson said that this is misguided thinking. Drug distribution provides valuable services, as seen with the swift recall of Vioxx. Also, distribution brings cost savings because of a sophisticated supply chain. If anything, because of its problems, the big pharmas will need to focus on their core business.
Unfortunately, what this may mean, ultimately, is more pressure on already razor-thin margins for drug distributors.
Fool contributor Tom Taulli does not own any of the shares mentioned in this article.
