Vtrade - Proposed BUY - McKesson Corp (NYSE: MCK)

McKesson Corporation

NYSE: MCK

COMPANY DESCRIPTION

San Francisco, CA-based McKesson Corporation is a health care services and information technology company. McKesson operates through two segments:

The Distribution Solutions segment distributes branded and generic pharmaceutical drugs along with other healthcare-related products on a global basis worldwide. The segment also provides practice management, technology, clinical support and business solutions to community-based oncology and other specialty practices. In addition, the segment provides specialty pharmaceutical solutions for pharmaceutical manufacturers including offering multiple distribution channels and study access to oncology physicians. The segment also provides medical-surgical supply distribution, equipment, logistics and other services to healthcare providers within the U.S.

The Technology Solutions segment provides enterprise-wide clinical, patient care, financial, supply chain, and strategic management software solutions.

RECOMMENDATION

We rate McKesson Corporation a BUY. Below are the basic reasons to recommend this stock as a BUY.

Current Growth Initiatives: The company lately announced a multi-year strategic growth initiative, focused on creating innovative new solutions that improve patient care delivery and drive incremental profit growth. The plan is to implement differential pricing for brand, generic, specialty, biosimilar and OTC (Over-the-counter) drug classes in line with services offered to both customers and manufacturers.

Management aims to increase efficiency, accelerate execution and improve long-term performance through its initiatives that consist of multiple growth pillars. By the end of the first quarter of fiscal 2019, management at McKesson announced that the company is making strong progress in its operating model and other cost-out initiatives. Based on strong business strategies, the company is expected to drive increased efficiency and productivity.

McKesson is also in the budget development process for Fiscal 2019 and declared a preliminary target for adjusted Earnings of $13.00-13.80 per share. By the end of the first quarter of fiscal 2019, the company increased the quarterly dividend by 15% to 39 cents, which will be payable to shareholders in October. As of now, the company has total of $4.8 billion remaining on its share repurchase authorization program.

Strong Player in Distribution Market: McKesson is a major player in the pharmaceutical and medical supplies distribution market.

The company’s distribution solutions segment kept up its performance in fiscal 2018 despite weak pricing trends and customer consolidation. The Distribution Solutions segment caters to a wide range of customers and businesses and stands to benefit from increased generic utilization, inflation in generics driven by several patent expirations in the next few years, and an aging population.

At the end of first quarter of fiscal 2019, Plasma and Biologics distribution business witnessed strong growth. Distribution solutions business revenue growth rose significantly, contributing to the whole of the company’s revenues. The upside is driven by market growth and acquisitions.

Acquisitions: McKesson has been actively pursuing deals, divestitures and acquisitions to drive growth. In June, the company completed the acquisition of Medical Specialties Distributors (MSD) for $800 million. The deal is expected to expand the company’s manufacturer value proposition in specialty capabilities.

In January, McKesson completed the acquisition of RxCrossroads from CVS Health Corp. RxCrossroads is a provider of tailored services to pharmaceutical and biotechnology manufacturers. The transaction is valued at $735 million and has been entirely funded by cash on hand.

In 2017, the company acquired electronic prior authorization solutions provider to pharmacies, providers, payers and pharmaceutical manufacturers--CoverMyMeds for approximately $1.1 billion. McKesson has also been working to integrate Rexall and other recent acquisitions which are expected to drive earnings. These acquisitions are expected to bolster the company’s retail pharmacy footprint internationally.

Divestitures: In an initiative to focus on core strength, McKesson’s divested Enterprise Information segment recently for approximately $185 million in cash. Notably, the Enterprise Information Solutions portfolio included a robust set of clinical and financial solutions supporting the full scope of care delivery processes — including Paragon (EHR solution); STAR and HealthQuest (Revenue Cycle solutions); Lab Analytics and Blood Bank; and OneContent (Content Management solutions).

Separating Technology Business: McKesson divested its Technology Solutions business and merged the same with Change Healthcare Holdings to form a new healthcare information technology entity.

The Technology Solutions business has been facing challenges for quite some time now as revenues continued to decline. Hence, a spin-off of the business was around the corner as the company was looking to focus on its core distribution business. As part of the agreement, McKesson will offer most of its Technology Solutions businesses but will retain RelayHealth Pharmacy and Enterprise Information Solutions (EIS). McKesson will hold 70% of the new company. Meanwhile, the company is exploring strategic alternatives for the EIS division and we believe a divestiture is on the cards.

LAST EARNINGS

McKesson reported first-quarter fiscal 2019 earnings of $2.90 per share, beating the Consensus Estimate of $2.89. Adjusted earnings improved 17.9% year over year. McKesson posted sales of $52.61 billion, lagging the Consensus Estimate for revenues of $53.04 billion. The figure rose 3% on a year-over-year basis.