Healthcare services and information technology company McKesson Corp. (MCK) provided cautious outlook for the year 2012 thereby limiting any upside in the stock movement after its third quarter earnings and revenues came in above Street expectations.
The company separately announced its decision to buy Medicine Shoppe Canada Inc. and Drug Trading Company Ltd. for C$920 million from Katz Group of Canada. The results and the acquisition stock created enthusiasm in the market for a brief period by reversing the trend in the extended hours trading. But it failed to hold on and the gains of more than 3 percent witnessed immediately after the news flow were slowly lost for a slender gain of around 0.3 percent.
McKesson does not expect the deal to allow accretion of earnings in 2012 and sees it only after first year from closing.
Q3 Results
The San Francisco, California-based McKesson reported net income of $300 million, up 94 percent from $155 million and earnings doubled to $1.20 a share from $0.60 a share in the year earlier quarter. Excluding any special items, the company would have earned $1.40 a share, still higher than $1.28 a share in the year-ago quarter. Last year results included litigation charges of $189 million compared with latest quarter's $27 million.
Top line recorded a growth of 9.2 percent to $30.8 billion from $28.3 billion in the previous year quarter. Wall Street analysts were estimating the company to deliver earnings of $1.37 per share on revenues of $30.08 billion.
Adjusted operating margin in technology solutions slipped to 10.8 percent from 15.3 percent, while distribution solutions' adjusted operating margins improved slightly to 1.91 percent from 1.88 percent in the year-ago quarter.
The company also disclosed that its board gave an additional $650 million for share buy back taking the total available authorized amount to about $1.5 billion, which will allow the company's EPS to grow faster.
Outlook
Moving ahead, McKesson sees adjusted earnings of $6.19 - $6.39 a share for the year 2012. This is based on the current market trend and 9-months performance. The company had already delivered adjusted earnings of $4.30 a share from the nine-month period. Street analysts' are predicting the company to earn $2.07 a share for the fourth quarter. If the company could achieve this, then it could surpass analysts' full year estimation of $6.33 a share.
Given the company's full year earnings outlook and taking into account nine-month earnings, McKesson's fourth quarter earnings projection comes to around $1.79 - $1.99 a share. This is lower than analysts' estimation of $2.07 a share. But the company seems to be taking cover under third quarter's adjusted earnings performance, which came in three cents more than expected.
Deal
McKesson struck a deal to buy independent banner and franchise units of Katz Group Canada Inc. for about C$920 million. The Canadian independent banner handles approximately 160 pharmacies. The company sees the transaction to close by the first half of 2012.
Our Take
An investor would always like the momentum to be there. If the company's earnings came in above expectations in third quarter, naturally investor will expect similar trend to continue in the coming quarters too. But McKesson projection of full year earnings outlook leaves fourth quarter earnings to be less than Street consensus. By doing this, the momentum seems to be lost and the stock appears to offer less charm in the near term.