Cardinal Health Looks Strong, Beats Earnings Estimates By 25%

| About: Cardinal Health (CAH)

In the past month, Cardinal Health (NYSE:CAH) saw its stock rise just under 10% due to positive news coming from the Dublin, Ohio-based company, including -- for the fourth straight quarter -- beating projected earnings estimates. On May 2, the company announced third-quarter 2013 sales of $24.6 billion compared to $26.9 billion from the previous year. Net income came in at $345 million, or $1.00 a share, compared with the $333 million, or $0.96 a share, over the same period the previous ago. Adjusted earnings were $1.20 a share, beating the $0.96 that analysts forecast.

The company also raised its fiscal 2013 profit target from $3.42 to $3.50 per share to $3.67 to $3.71 a share, including its $0.18 per share tax settlement. Though profits were up, the company did experience a drop of 10% in its core drug distribution business with the loss of two of its larger clients over the past year and a half. The company also announced it was increasing its quarterly dividend 10% to $0.30 per share, or $1.21 on an annualized basis.

There have been a number of positive announcements coming from Cardinal lately. On April 25, the company announced that it renewed its distribution agreement with the nation's largest retail drug chain, CVS Caremark (NYSE:CVS), through 2016. The renewing of the contract is big news for the company considering that Cardinal lost its other two major accounts last year. Walgreen (WAG) -- which brought in $22 billion, or 21% of Cardinal's annual revenue -- followed Express Script (NASDAQ:ESRX) and its $20 billion in sales, and chose not to renew its contract with Cardinal. Though neither Cardinal nor CVS provided any details on the new agreement, the contract is estimated to be worth about $23 million annually -- which, according to the Drug Channel, may represent between 30% and 40% of Cardinal's core business. To illustrate the importance of the CVS deal after the losses of Walgreen and Express Script, CVS previously accounted for an estimated 24.6% of Cardinal's total U.S. core drug distribution revenues.

Cardinal Health's Nuclear Pharmacy Services, which operates roughly 160 nuclear pharmacies and cyclotron facilities, is the leading provider of unit-dose radiopharmaceuticals in the U.S., dispensing and delivering over 12 million time-critical, patient-specific doses to hospitals and clinics annually. In 2012, the U.S. radiopharmaceutical market was valued at $1.9 billion and is expected to reach $2.7 billion by 2017. On May 1, the company announced it began the launch of Navidea Biopharmaceuticals' (NYSEMKT:NAVB) radiopharmaceutical therapy, Lymphoseek, used for lymphatic mapping procedures to assist in the localization of lymph nodes draining a primary tumor in patients with breast cancer or melanoma. Under its exclusive U.S. distribution deal with Cardinal's Nuclear Pharmacy Services, Lymphoseek, which is a first-in-class mannose receptor (CD206) binding radiopharmaceutical technetium-99 (Tc-99m), is injected at the site of the primary tumor. A gamma detection devise then tracks the drainage pathway of the tracing agent from the tumor to the nearest lymph node. If the node shows no sign of malignancy, the downstream nodes are likely to be clear of cancer tumors, and the removal of other nearby lymph nodes is clinically unnecessary. Analysts at Burrill & Co. expect Lymphoseek revenues in the U.S., which will be split by the two companies, could climb as high as $61.5 million.

Cardinal has also entered the highly profitable home medical supply business when, in April, the company completed its $2.1 billion acquisition of AssuraMed, a direct to home medical supply distributor. AssuraMed saw revenues of $1 billion in 2012 while servicing over 1 million patients nationwide. Due to an aging population and the coming of the government's Affordable Care Act, the home health industry should be a growing and profitable segment. In 2011 the industry took in $74.3 billion, growing 5.8% over 2010 figures. Medicare and Medicaid accounted for slightly over 80% of total home healthcare spending. And with the acquisition of AssuraMed, Cardinal has positioned the company to be a major player in the future of home health.

Cardinal Health is a $15.70 billion market capitalization company. Although many analysts have a neutral outlook for the company's next-quarter performance, one cannot overlook that Cardinal has bounced back strongly after losing two of its major clients in Walgreen and Express Script. The company is focusing on products that produce higher margins, such as generic drugs. Though bringing in less revenue, generics do have higher profit margins.

I see Cardinal Health positioning itself to be a major player in the future of healthcare. With the coming of the Affordable Care Act, millions of new patients will be utilizing services that rely on Cardinal's products, from radiotherapies and generic drugs to home health services. Though Cardinal has hit a few bumps in the road, I think that the stock will continue to outperform expectations.

Disclosure: I am long CAH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.