McKesson Sees Momentum

The big drug wholesaler cites a strong revenue gain in the latest quarter.
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McKesson

(MCK) - Get Report

, one of the nation's largest drug distributors, delivered a solid quarter on Wednesday.

The company saw first-quarter revenue jump by 10% to $21.1 billion on continued improvement in its core Pharmaceutical Solutions business and an exceptionally strong performance by its smaller Provider Technologies division. Net income, hit by reserves for litigation expenses, remained essentially flat at $171 million or 55 cents a share. Excluding special items, however, the company managed to increase earnings by 20% to 66 cents a share.

Meanwhile, quarterly cash flow rocketed nearly sixfold to $637 million.

"McKesson's strong momentum from the second half of fiscal 2005 is continuing into the first quarter of fiscal 2006," CEO John Hammergren said. "More efficient inventory management in our pharmaceutical distribution business combined with improving financial performance in all of our segments continued to drive increasing operating cash flow."

Looking ahead, McKesson expects to post full-year profits of between $2.25 and $2.40 a share. Analysts, on average, were forecasting full-year profits of $2.29 ahead of the company's update.

McKesson's stock inched up 20 cents to $45.02 before the company issued its results.

Triple Play

In the recent quarter, McKesson reported growth across all three of its major business lines.

In the Pharmaceutical Solutions division, revenue jumped 10% -- matching the overall company average -- as the company shifted to new distribution agreements and capitalized on Canadian growth to offset an expected slowdown in customer warehouse sales. Operating profit, helped by a $51 million lawsuit settlement, rose 4% despite an increase in expenses.

In the Medical-Surgical Solutions unit, growth proved to be slower. Revenue climbed just 5%, with profits remaining flat, although the company sounded upbeat about its flu vaccine orders and reiterated its positive outlook for the division overall.

Meanwhile, Provider Technologies delivered the strongest results of all. There, revenue jumped 17%, and operating profits more than doubled with help from the company's successful software business.

Sunny Outlook

Lehman Brothers analyst Lawrence Marsh raised his expectations for the company in anticipation of solid numbers.

Marsh suggested that price inflation would push first-quarter drug profits higher for the quarter. And he suggested that a $1 billion share repurchase program would further lift results for the entire year.

In the meantime, Marsh expressed optimism about an apparent new business win -- representing more than $1 billion in annual revenue -- as well.

"It sounds as if McKesson has been awarded the Publix business, starting either later this year or early in 2006, as we understand it," wrote Marsh, who has an equal-weight rating on the company's stock. And "Publix Super Markets, based in Lakeland, Fla., is defined as the largest and fastest-growing employee-owned supermarket chain in the United States."

Marsh calls Publix a "bouncing ball" account, won first by

AmerisourceBergen

(ABC) - Get Report

and then by

Cardinal

(CAH) - Get Report

and now in the hands of McKesson. He expects the new contract to offset some of the $4 billion-plus in business McKesson has recently lost.

Just after Marsh issued his comments earlier this month, McKesson announced plans for an acquisition that will increase its business as well. McKesson is snatching up D&K Healthcare in a $475 million deal that, Marsh estimates, will boost the company's independent pharmacy revenues by more than 30% to some $12 billion.

"And we note that D&K has seen revenues from independent pharmacies increase substantially over the past couple of years," he added.

Going forward, Marsh expects the acquisition to add at least 4 cents a share -- and potentially four times that amount -- to McKesson's annual earnings. With a little help from its new purchase, Marsh estimates, McKesson should be able to increase yearly profits from $2.33 in 2006 to $2.70 in 2007.

Wall Street continues to look for a few cents less.