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ISI Upgraded McKesson Following Celesio Aquisition and Strong FY2Q14 Results

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In a report published Thursday, ISI Group LLC analyst Michael Cherny upgraded McKesson Corporation (NYSE: MCK) from Buy to Strong Buy, raising estimates and the PT from $152 to $175 following the Celesio acquisition and strong FY2Q14 results.

This morning, McKesson announced that they are acquiring Celesio, a leading international wholesale and retail Company providing logistics and services to the pharmaceutical and healthcare sectors, for $8.3B (€6.1B, €23 per share). This purchase is a 39 percent premium over the 3-month average price.

ISI group commented, “The announcement includes a share purchase agreement between McKesson and Franz Haniel & Cie. GmbH for its 50.01 percent stake in Celesio as well as a tender offer for the remaining outstanding shares (which will finish no earlier than January 17, 2014), and we expect the deal to close around April 1. The pro forma company will have revenues >$150 Bn, and expects to realize annual synergies of $275-$325 MM by year four post closure. MCK therefore estimates that acquiring Celesio should be $1.00-$1.20 accretive to adjusted EPS during the first 12 months post-close.”

Mckesson reported Q3 EPS of $2.27 versus ISI estimate of $2.07, and revenue of $33B versus ISI's $32.2B. EPS was up 18 percent from last year's 3Q and sales were up 11 percent YoY.

The company also reported that revenue increased 10.8 percent this quarter, and specifically noted that Direct Distribution & Services revenue grew seven percent. McKesson increased FY14 EPS guidance from $8.05-$8.35 to $8.40-$8.70 (vs. consensus of $8.32) due to strong YTD.

Cherny noted that McKesson's strong core trends and accretion from Celesio provides long term EPS visibility. Following the results, ISI increased FY14 estimates from $8.60 to $8.85 to reflect generic pricing strength, PSS synergies upside and 2Q outperformance. The analyst commented, “We are also raising FY15 and FY16 estimates meaningfully to $11.00 and $12.50, respectively, in order to account for the Celesio transaction.”

McKesson closed at $143.05 on Wednesday and is currently trading +5.34 percent.

Posted-In: ISI Group LLC Michael ChernyAnalyst Color Upgrades Price Target Analyst Ratings


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