Morningstar | McKesson Has Decent Quarter Despite International Headwinds; No Change to Our Thinking
McKesson reported mixed quarterly results, with lighter-than-expected revenue yet better-than-expected earnings. As we have heard consistently on earnings calls from companies under our coverage, generic drug pricing appears to have stabilized and branded inflation rates were in the midsingle digits as expected, which implies that volumes were likely softer than expected. Strong cost controls and share repurchases drove EPS upside relative to our expectations. Shares were up 5% intraday based on results but remain 15% below the 52-week high of $152. We maintain our narrow moat rating and fair value estimate, and we view shares as fairly valued at recent prices.Management provided fiscal 2020 EPS guidance of $13.85 to $14.45, reflecting low- to mid-single-digit revenue growth. Overall growth reflects the slightly better-than-inflationary rates in distribution with a boost from the entry into home health through the acquisition of MSD. Although increased transparency is generally anticipated to have an adverse impact on distributors, McKesson may have some interesting optionality with its CoverMyMeds and RelayHealth solutions, a differentiator from its distributor peers. The segment has access to more than 80% of payers and 50,000 retail pharmacies, and handles 18-19 billion pharmacy transactions annually, which would complement the basic wholesale chargeback platform.
For the fourth quarter and full year, revenue grew 2% and 3% year-over-year to reach $214 billion for fiscal 2019. Normalized fourth-quarter and full-year EPS increased 6% and 8% year-over-year to reach $13.57 for fiscal 2019. U.S. Pharmaceutical and Specialty Solutions revenue increased 3%, driven by specialty drug volume growth. The international business remained flat at $27 billion, largely hindered by currency and U.K. and Canadian regulatory headwinds. Medsurg, excluding the impact of the MSD acquisition, grew 6%. Normalized operating margin of 1.6% declined slightly from the prior year.
McKesson provides pharmaceuticals and medical supplies and services to its customers. The company's segments include: U.S. Pharmaceutical and Specialty Solutions, which provides distribution and logistics services for branded, generic, specialty, biosimilar and over-the-counter pharmaceutical drugs and other healthcare-related products to customers; European Pharmaceutical Solutions, which provides distribution and services to wholesale, institutional and retail customers in European countries where it owns, partners or franchises with retail pharmacies; and Medical-Surgical Solutions, which delivers medical-supply distribution, logistics, biomedical and other services to healthcare providers.
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