Bear Stearns Trims McKesson to 'Peer Perform'

Analyst Raymond Falci says the pharmaceutical-services company is focusing on growing profits at the expense of its return on capital

Bear Stearns downgraded McKesson (MCK ) to peer perform.

Analyst Raymond Falci says McKesson is now stuck in long-term contracts worth about $4 billion in annual revenues. He says these recent winning bids, including the Veteran Affairs contract at $2.9 billion and Cigna's contract at $1 billion, were likely submitted before McKesson saw the full impact of decreased buyside profit opportunities. He thinks both of these contracts will prevent pharmaceutical-distribution operating margin expansion for McKesson in fiscal 2005.

In light of the recent contracts, Falci thinks that, unlike AmerisourceBergen and Cardinal Health, McKesson is focusing on growing its revenue, earnings, and EBIT in absolute dollars at the expense of its return on capital.

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