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Cardinal Health (CAH) is slated to report first-quarter fiscal 2011 (ending September 30) results on Thursday, October 28. The current Zacks Consensus Estimate for the first quarter is 53 cents, representing an estimated 1.66% year-over-year decline. The company expects earnings per share in the range of $2.38 to $2.48 for fiscal 2011. The current Zacks Consensus Estimate for sales for the first quarter is $25.1 billion.

Fourth Quarter Recap

Cardinal Health reported fourth-quarter fiscal 2010 adjusted earnings per share of 50 cents, beating the Zacks Consensus Estimate by a penny. Total sales increased a mere 0.5% year over year to $24.5 billion, which was marginally below the Zacks Consensus Estimate.

Revenue for the larger Pharmaceutical segment moved up a modest 0.2% year over year to $22.3 billion. In this segment, sales to bulk customers dipped 3% while revenue from non-bulk clients spiked 3% year over year. Revenue from the Medical segment was $2.2 billion, up 3% on account of sales growth with existing clients.

Margins continued to be thin, reflecting a general industry trend. Segment profit margin for Pharmaceutical was 1.02%, down from 1.23% in the year-ago quarter.

Estimate Revision Trend

Agreement: Estimates for the first quarter have been largely stagnant. Out of a total of 19 analysts currently covering the stock, none raised their estimates in the prior 7 or 30 days, with only one downward revision in the past month. Estimates for fiscal 2011 have been absolutely flat with no revisions, in either direction, among the 20 analysts covering the stock.

Magnitude: The magnitude of estimate revision for the first quarter, as well as fiscal 2011, has been static over the last week and month. The current Zacks Consensus Estimate for fiscal 2011 is $2.45, representing an estimated 10.32% year-over-year increase.

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 U.S. with a diversified product portfolio, which may provide a partial insulation from economic uncertainty.

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 degree of customer concentration and is reliant on renewal of key accounts. It is noteworthy that Cardinal Health has long-term contracts with a few chain customer clients.

The spin-off of CareFusion Corporation (CFN) has enabled 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. Its major competitors in the pharmaceutical supply chain segment include McKesson Corp. (MCK) and AmerisourceBergen Corp. (ABC).

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 may help drive margin expansion from current depressed levels.

Cardinal Health’s generic business showed continuing signs of strength. Growth in this business continues to surpass the market growth rate. The company expects its generic business to gain further momentum in fiscal 2011 and 2012. We currently have a Neutral recommendation on Cardinal Health over the long term. The stock currently retains a Zacks #4 Rank, which translates into a short-term Sell recommendation.

Source: Cardinal Health: Earnings Preview

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