What’s Wrong With McKesson Corporation?

McKesson Corporation’s (NYSE:MCK) shares fell 23% on Friday. It was another scary episode on how quickly share prices can turn. Unfortunately, the share price decline in McKesson is not entirely unfounded. Is the company now undervalued? Should you invest in it?

Last Thursday, McKesson Corporation (NYSE:MCK) reported its Q2 2017 results after market close. Its shares reacted negatively by sliding as much as 28% the next day. More than 28 million shares traded hands, which was 17x that of its average volume!

What did McKesson report?

For Q2, McKesson generated revenues of $50 billion which were 2% higher year over year. GAAP earnings per diluted share from continuing operations was $1.35, down 49% year over year.

However, the year-over-year expectation for the fiscal year 2017 isn’t as scary as that double-digit earnings decline. Specifically, management lowered its earnings guidance for fiscal 2017 from a growth of 7-11% (estimated in Q1) to a year-over-year change of -1% to 3%.

The negative outlook resulted from recent customer pricing activities and a trend of slower branded pharmaceutical inflation.

Increased competition

McKesson has always operated in a competitive environment, but instead of being concerned about customer pricing, it has always focused on delivering value. For example, it focuses on delivering exceptional service and innovation to help its customers to more effectively and efficiently connect with patients.

Unfortunately, in Q1, McKesson began experiencing some customer pricing softness, which has worsened in Q2.

This is what CEO John Hammergren had to say about it:

“What we began to see more recently is competitive activity…”

Unfortunately, I’ve maxed out the number of words I can include in this excerpt which originated from my Seeking Alpha article. However, you can read the full article here: Why McKesson Corporation Shares Fell 23% In A Day

We’ll probably see lots of volatility in the near term. The picture should clear up a bit after Cardinal Health Inc. (NYSE:CAH) reports on Monday and AmerisourceBergen Corp. (NYSE:ABC) reports on Wednesday. Interested investors who are cautious should wait till after those dates to decide if they want to invest in the healthcare distributor space.

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Disclosure: At the time of writing, the author owns shares in McKesson.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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