McKesson Keeps Growing and Sees an Even Better Future Ahead

Image: McKesson.

The healthcare industry is a huge part of the U.S. economy, and dealing with the volume of prescription drugs that Americans need every day is a full-time business for many large companies. Increasingly, drug wholesalers like McKesson have played a growing role in ensuring that high-quality prescription drugs get from manufacturers to consumers, and with its ability to take a cut as an intermediary, McKesson has seen its stock price soar in recent years. Coming into Tuesday afternoon's fiscal fourth-quarter financial report, McKesson investors wanted to see continued evidence of its business expansion, and McKesson didn't disappoint with strong bottom-line gains. Let's take a closer look at how McKesson did during the quarter and why it thinks even better times are coming in the next fiscal year.

McKesson delivers the goodsMcKesson's fiscal fourth-quarter results continued its impressive pace of growth. Revenue climbed 19% to $44.9 billion, which was actually just a bit less that the $45 billion that most investors were expecting from the company. But McKesson topped the consensus earnings projections among those following the stock, with adjusted earnings of $2.94 per share marking 8% better results than the $2.71 per share McKesson made this time last year.

Looking more closely at McKesson's business segments, the company's strength came entirely from the drug-distribution side of the business. The Distribution Solutions segment saw 19% growth, with the best results coming from its international distribution and services business, where sales soared 30%. By contrast, McKesson's Technology Solutions segment saw revenue drop 10%, but given that the business makes up less than 2% of McKesson's overall revenue, it didn't have a material impact on overall results. Similar disparities in performance between the two segments showed up in terms of operating profits as well.

McKesson's full-year results were even stronger. Revenue jumped 30% to $179 billion, while adjusted earnings of $11.11 per share were up by nearly the same percentage and topped investors' expectations by $0.20 per share.

Image: McKesson.

CEO John Hammergren was pleased with the gains. "We continue to deliver tremendous value for our customers by developing solutions that help drive better business health," Hammergren said, "and focus on helping our customers use information technology strategically to enable better business, better care, and better connectivity." Hammergren specifically called out the Relay Health, Payer Solutions, and Medical Imaging businesses as helping to lead the technology division higher, even in the face of slowdowns in other areas like hospital software and the winding down of its international tech business.

What's next for McKesson?McKesson's guidance for the coming 2016 fiscal year was consistent with what most investors had expected. The company believes it should post adjusted earnings of $12.20 to $12.70 per share in the coming year, which would represent growth of 12% to 16% on a currency-neutral basis. Distribution Solutions revenue should grow by mid-single digit percentages, with particular strength in North America overcoming sluggish results elsewhere in the world.

McKesson has also started highlighting stock buybacks as part of its capital return strategy to shareholders. During the past quarter, McKesson has bought back $340 million in stock, and it recently authorized another $500 million in repurchases for the future. At the same time, McKesson maintained a modest dividend, and it has also worked hard to maintain its investment-grade bond rating to minimize financing costs.

McKesson shareholders didn't seem all that surprised by the results, with the shares rising by less than half a percent in the first hour of after-market trading following the announcement. The company has done a good job of demonstrating that a combination of organic growth and smart acquisitions can help drive overall sales and profits higher, and McKesson appears to have plenty of room to keep moving higher. As long as conditions in the healthcare industry remain favorable, McKesson could keep rewarding shareholders with solid returns from their investment in the future.

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