McKesson Surges Despite Missing Expectations - TheStreet

McKesson Surges Despite Missing Expectations

Meanwhile, hospital-operator Columbia/HCA Healthcare reported earnings that beat analysts' expectations by 2 cents.
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McKesson HBOC

(MCK) - Get Report

reported earnings today that missed Wall Street analysts' expectations by 5 cents, but shares for the nation's largest drug wholesaler still surged in mid-morning trading.

Shares for McKesson jumped more than 3 points in early trading and were up 2 1/8 to 21 5/8 by late morning.

Meanwhile, hospital-operator

Columbia/HCA Healthcare


reported earnings that beat analysts' expectations by 2 cents.

Both McKesson and an analyst who covers the company said the stock rose because McKesson has been silent since warning investors in July of financial problems caused from its acquisition of a software maker. From that point, McKesson's stock fell from the high 30s to the high teens last week.

"It looks like the Street was anticipating something even worse," said Alexander Draper, vice president of research for


, who gives McKesson a long-term buy rating. Robinson-Humphrey has not done underwriting for McKesson. "Very few people wanted to buy it in front of the quarter and sellers didn't want to own it either."

Larry Kurtz, a spokesman for McKesson, added analysts were "provided very little guidance. They made their best guesses without much information from us."

McKesson reported operating profits for its second fiscal quarter ended Sept. 30 rose 4.4% to $75.2 million, or 27 cents a share, from $72 million, or 26 cents a share, for the comparable 1998 quarter. A consensus of analysts polled by

First Call/Thomson Financial

called for the San Francisco-based firm to post 32 cents a share.

Although McKesson missed expectations, Draper said the company is headed in the right direction by trying to corner the entire health-care supply industry, an effort it expanded a year ago when it bought HBO & C, the nation's No. 1 software maker for hospitals. The question for analysts now is, can McKesson follow through with its plan?

"I still agree with the long-term strategy -- if they can pull it off, the strategy and vision is a home run," Draper said. "Clearly, the execution has left something to desire."

Buying HBOC has proven to be costly as McKesson paid $15.9 million after taxes for accounting and legal costs last quarter related to its $14 billion purchase earlier this year because McKesson learned after the deal that HBOC had improperly been keeping its books. The charge reduced net income to $59.3 million, or 21 cents a diluted share, for the quarter, compared with $26.3 million, or 10 cents a share, in the year-earlier period. (The company took special charges of $45.7 million in the second fiscal quarter of 1999.)

Company officials said technical operations have been hurt because its clients continue to fear the effects of potential problems to software caused by the Year 2000 bug.

"The focus of our customers remains on their compliance with Year 2000 requirements, to the virtual exclusion of any other information system initiatives, which continues to depress software sales," John H. Hammergren, McKesson's co-president and co-chief executive, said in a statement. "However, we are beginning to see an increased level of interest among our customers in their information technology needs beyond Y2K."

Revenue for the second quarter increased 23.7% to $9 billion from $7.3 billion in the comparable quarter a year ago.

Columbia, which operates 214 hospitals and 84 surgery centers, said its third-quarter income from continuing operations, excluding restructuring and investigation-related costs, totaled $155 million, or 27 cents a diluted share, compared with $131 million, or 20 cents a share, for the 1998 third quarter. Analysts polled by First Call expected Columbia to report earnings of 25 cents a share.

The company, which is being investigated for Medicare fraud, said its financial results were down because it received reduced Medicare reimbursements, increasing supply costs from new technology and drugs, and further bad debt expense. Columbia, which is based in Nashville, Tenn., reported a total debt of approximately $6.5 billion.

Shares for Columbia rise 5/8 to 22 3/8 in mid-morning trading.

Net income fell 5%, to $138 million, or 24 cents a diluted share, from $146 million, or 22 cents a share, a year earlier. Revenues for the third quarter fell to $3.9 billion from $4.6 billion in the comparable 1998 quarter.