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McKesson Corp. (MCK) reported in-line results for the third quarter of fiscal 2010. Earnings came in at $1.19 per share, in line with the Zacks Consensus Estimate, and 13% above the year-ago profit of $1.05. Meanwhile, revenues increased 4% to $28.3 billion, driven by the strong performance of the Distribution Solutions business.

Although the Distribution Solutions segment grew 4% to $27.5 billion, the loss of two customer buying groups in the U.S. continued to impact the performance of this segment. We believe performance will continue to be impacted by lost business through the remainder of the year.

Meanwhile, Medical-Surgical distribution revenues increased 11% to $758 million, benefiting from small acquisitions made by the company in late fiscal 2009 and an increase in demand during the flu season. The Specialty Care Solutions business performed well mainly due to the launch of a generic product during the quarter.

The Technology Solutions segment recorded a 3% increase in revenues. While service revenues grew 6%, reflecting the steady nature of the company’s products, software revenues were down 2%. Hardware revenues also declined ($23 million, down 32%), reflecting lower rates at which hardware is attached as part of system implementations and overall reduced hardware component costs.

Guidance Boosted

McKesson once again raised its earnings guidance for fiscal 2010. The company boosted its previously issued guidance by 10 cents and now expects earnings in the range of $4.55−$4.70. McKesson should continue benefiting from the increased demand related to flu season in the fourth quarter of fiscal 2010. McKesson expects the strong flu season to contribute 35−40 cents to fiscal 2010 EPS.

Estimate Revisions Trend

Despite the company boosting its outlook for fiscal 2010, there were no estimate revisions in either direction for fiscal 2010 over the last 30 days. The lack of revisions is not surprising, as the Zacks Consensus Estimate of $4.61 is already within the new guidance range issued by McKesson.

Fiscal 2010 earnings are slated to be in-line with expectations. In the past, McKesson has usually performed in-line or above expectations. While third quarter results were in-line with expectations, second quarter results were 5.94% above. On an average, McKesson has exceeded expectations by 12.05% over the past four quarters.

Only one of the 21 analysts following the stock has raised their estimates for fiscal 2011 over the last 30 days. There have been no downward revisions during this period. The Zacks Consensus Estimate for fiscal 2011 is currently $4.73. We remain concerned about the sustainability of the positive impact of the strong flu season on McKesson’s performance going forward.

Management estimates that the flu season will boost fiscal 2010 earnings by 35-40 cents. However, with the swine flu pandemic turning out to be less severe than expected, we believe the company will need to explore other business opportunities that would help sustain growth in fiscal 2011.

Our Take

We currently have a Neutral recommendation on McKesson Corp. McKesson is a major player in the pharmaceutical and medical supplies distribution market, and we believe that several factors like aging population, increased use of generics, growing demand for specialty pharmaceutical products, especially oncology drugs, should help drive growth in the Distribution Solutions segment.

The Technology Solutions segment is also well-positioned for growth given the government’s focus on reducing healthcare costs and the expanded use of information technology systems.

However, McKesson faces tough competition and the loss of two major customers in fiscal 2009 will continue to impact the company’s business through the remainder of fiscal 2010.

Source: Cautious Outlook on McKesson