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Tickers in this Article: MCK, ABC, HMA, UHS, CVS, RAD
McKesson Corp. (NYSE:MCK) and archrival AmerisourceBergen Corp. (NYSE:ABC) are two of the largest drug distributors in the country. Their services form the backbone of getting drugs from manufacturers to drug retailers and hospitals where end-patients can obtain their medicine. McKesson released third-quarter earnings on Monday that saw continued strong results and robust trends from distributing generic drugs. The stock price has had a strong recent run but the fundamentals suggest further upside potential over the next few years. IN PICTURES: 9 Simple Investing Ratios You Need To Know

Third-Quarter Recap
MCK's sales rose a modest 1% to $28.2 billion as sales in the flagship pharmaceutical distribution segment grew 1% to account for a very high percentage of total revenue at 97.2%. The unit also distributes a small amount of medical and surgical equipment. The other segment is technology solutions, which helps hospitals such as HMA (NYSE:HMA) and Universal Health Services (NYSE:UHS) and related healthcare providers use technology to better manage their supply chain and financial operations. McKesson also reported a top-line increase of 1%.

The technology segment may be small, but it is very profitable and accounted for just over 25% of quarterly operating profits. The distribution unit had a hefty litigation charge for the quarter that dented profitability. Reported net income fell 52% to $155 million, or 60 cents per share but would have been $1.12 in the company's estimation when backing out one-time charges such as the litigation charge. This beat analyst projections by a penny.

Outlook
Management currently projects full-year earnings between $4.82 and $5.02 per diluted share. This excludes the litigation expense as well as costs to acquire U.S. Oncology. The purchase allows McKesson the opportunity to distribute supplies and services to oncologists throughout the country, and it is expected to further boost sales and profits going forward.

For the full year, analysts expect sales growth of about 3% for total sales of nearly $112 billion. Last year, 27% of sales stemmed from retail pharmacy chains CVS (NYSE:CVS) and Rite Aid (NYSE:RAD), so it is worth tracking their trends for insight into McKesson's top-line direction.

Bottom Line
McKesson may report small profit margins but its business throws off tons of cash. Last year, free cash flow exceeded $7 per diluted share to exceed reported net income by a fairly wide margin. So while the forward earnings multiple is starting to look lofty at over 15, the trailing free cash multiple is much more reasonable at closer to 11. The stock is bumping against its highs over the past year, but it is still worth a look as earnings growth should continue in the double-digits on the back of strong generic growth and healthcare legislation that will add millions of more patients into the system. (For more, see Investing In The Healthcare Sector.)

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