McKesson Corp (NYSE:MCK)

CAPS Rating: 5 out of 5

Providing supply, information and care management products and services designed to reduce costs and improve quality across the healthcare industry.

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Player Avatar paek813 (99.59) Submitted: 6/26/2013 8:43:02 PM : Outperform Start Price: $114.98 MCK Score: +52.73

S&P 5 STARThis company provides pharmaceutical supply management and information technologies to a broad range of health care customers.June 26, 2013S&P REITERATES STRONG BUY OPINION ON SHARES OF MCKESSON: We are encouraged by the long-term drivers outlined today at MCK's investor day. We keep our 12-month target price of $133, and our FY 14 (Mar.) adjusted EPS estimate of $8.20, which is aligned with the upper end of management's reaffirmed adjusted EPS guidance range of $7.90-$8.20. Key positive trends we see include a significant rebound in brand-to-generic conversions (which are much more profitable for distributors than branded drugs), and projected accelerated growth in technology revenues. We also see results augmented by acquisitions, and recent major contract renewals.We believe MCK's large footprints in drugs, medical supplies and information technology provide important cross-selling opportunities. We think its lead positions in drug and medical products distribution and pharmacy systems reinforce its cost-competitiveness, while distribution margins should continue to benefit from generic drug penetration. We are encouraged by the renewals of major contracts with CVS and the Veterans Administration. We also view acquisitions as a key element in the McKesson growth story, the latest one being PSS World Medical. Acquired in February 2013, PSS distributes medical products to physicians, laboratories and others. We think the deal could provide EPS accretion of $0.20 in FY 14.Our 12-month target price of $133 is derived by applying a peer-level 14.3X multiple to our FY 15 cash EPS estimate of $9.30. Our target price implies a projected FY 14 EV/EBITDA multiple of about 8X, which is also comparable to peers.We forecast that revenues in FY 14 (Mar.) will show mid-single digit growth from FY 13's $122 billion. Revenues in the Drug Distribution segment are expected to rise sharply, reflecting a slowing in brand-to-generic conversions (branded drugs command higher prices), robust growth in several of MCK's largest existing customers, and new customer wins. We also see gains for the medical-surgical unit, boosted by the recent acquisition of PSS World Medical, a distributor of medical supplies to physicians and others. Revenues in the Technology Solutions unit should rise modestly as consultations with hospitals on electronic health record systems translate into bookings.We expect gross and operating margins to widen modestly in FY 14, helped by cost streamlining measures. We see EBITDA rising to over $3.4 billion in FY 14, from about $3.0 billion in FY 13.After a projected FY 14 adjusted effective tax rate slightly lower than FY 13's 31.3%, we forecast cash EPS of $8.20 for FY 14 and $9.30 for FY 15, excluding goodwill amortization and other specified items. Share repurchases should bolster EPS comparisons.

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