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Cardinal Health (CAH) is slated to report fourth-quarter and fiscal 2010 (ending June 30, 2010) results on Thursday, August 5, 2010. The company earlier issued earnings per share guidance in the range of $2.15 to $2.20 for fiscal 2010. The current Zacks Consensus Estimate for the fourth quarter is 49 cents, representing an estimated 43.2% year over year decline.

Third Quarter Recap

Cardinal Health reported third-quarter fiscal 2010 adjusted (excluding one-time gain on sale of CareFusion stock) earnings per share of 61 cents, outperforming the Zacks Consensus Estimate of 57 cents.

Total sales increased 1% year over year to $24.3 billion. The company experienced moderate growth in both its business segments, Pharmaceutical (comprising bulk and non bulk customers) and Medical. Revenues for the much larger Pharmaceutical segment increased 0.5% year over year to $22.2 billion.

Margins continued to be thin, reflecting a general industry trend. Gross margin remained approximately flat year over year at 4.1% while operating margin declined 10 basis points (bps) year over year to 1.5%. (See 3rd quarter conference call transcript here.)

Estimate Revision Trend

Agreement: Estimates for the fourth quarter have been on an upward trend. Out of a total of 17 analysts currently covering the stock, 3 raised their estimates in the last 30 days with no downward revisions. Estimates for fiscal 2010 have also shown upward movements with 4 (out of 18) positive revisions in the past 30 days and no downward revisions.

Magnitude: The magnitude of earnings revisions has been nominal over the past 60 days. The magnitude of change for the fourth quarter was static over the last 7 days. However, there was an increase of 1 cent over the past 30 and 60 days. With regards to fiscal 2010, there was an increase of a penny over the last two months.

Our Take on Cardinal Health

We maintain our cautious stance on Cardinal Health. It continues to be one of the largest distributors of pharmaceuticals and medical supplies in the US with a diversified product portfolio.

Further, the company offers a good example of how distributors are positioning themselves through acquisitions, divestments and internal development initiatives to increase their value proposition for providers. Yet, the company continues to face a significant quantum of customer concentration on account of two large customers, Walgreen Co. (WAG) and CVS Caremark Corporation (CVS).

The spin-off of CareFusion Corporation (CFN) will enable the new Cardinal Health to focus on its core business. However, the company faces tough competition across all its business segments, which may pressure pricing and margins.

We are concerned that margins in the bulk pharmaceutical business are extremely low. However, the shift in the customer mix toward the non-bulk segment of the distribution business will help drive margin expansion from current depressed levels. Furthermore, we believe that Cardinal Health will need to boost its generics program in order to counter the impact of further branded margin erosion. We currently have a Neutral recommendation on Cardinal Health.

Disclosure: No positions

Source: Cardinal Health: Earnings Preview