Cardinal Health: Earnings Preview

| About: Cardinal Health (CAH)

Cardinal Health (NYSE:CAH) is slated to report second-quarter fiscal 2011 (ending December 31) results on Thursday, February 3. The current Zacks Consensus Estimate for the second quarter is 61 cents per share, representing an estimated 7.20% year-over-year hike. The company expects earnings per share in the range of $2.38 to $2.48, or a year over year increase of 7% to 12%, for fiscal 2011, excluding the recent Kinray and Yong Yu acquisitions. The current Zacks Consensus Estimate for revenues for the second quarter is $24.9 billion.

First Quarter Recap

Cardinal Health reported first-quarter fiscal 2011 adjusted earnings per share of 64 cents, beating the Zacks Consensus Estimate of 53 cents and surpassing the year-ago results of 54 cents. Total sales were down 1% year over year to $24.4 billion, slightly below the Zacks Consensus Estimate.

Revenues from the larger Pharmaceutical segment moved down 1% year over year to $22.3 billion, partly as a result of lower sales to pre-existing bulk customers. Generic pharmaceutical sales were up 19% while revenues from the company’s Source generics program jumped 34%.

Revenues from the Medical segment were $2.2 billion in the first quarter, dipping 3% partly due to the robust and early flu season in the year-ago quarter

Margins continued to be thin, reflecting a general industry trend. Segment profit margin for Pharmaceutical was 1.33%, up from 0.92% in the year-ago quarter.

Estimate Revision Trend


Estimates for the second quarter have been largely stagnant. Out of a total of 19 analysts covering the stock, only one changed his/her estimate over the last 7 days, which was in the downward direction. There was one positive revision and three negative revisions over the past 30 days.

With regard to estimates for fiscal 2011, only one analyst (out of 20) lowered his/her estimate over the past week with no reverse movements. There were four positive revisions and one negative revision during the past month. The current Zacks Consensus Estimate for fiscal 2011 is $2.52, representing an estimated 13.33% year-over-year increase.


The magnitude of estimate revision for the second quarter, as well as fiscal 2011, has been static over the prior week. There was a decline of a penny in the estimates for the quarter over the past month while there was a minor increase of a cent in the estimates for fiscal 2011 over the same timeframe.

Cardinal has generated positive surprises in each of the previous four quarters and we believe the same trend may continue. The company produced an average positive earnings surprise of 13.43% over the prior four quarters, meaning that it beat the Zacks Consensus Estimate by that measure.

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 certain key chain customers.

The spin-off of CareFusion Corporation (NYSE:CFN) has enabled the new Cardinal Health to focus on its core business. Cardinal’s $1 billion plus acquisition of Kinray, in December 2010, will enhance its capability to cater to independent retail pharmacies in the northeastern U.S. markets. Last November, the company entered the lucrative Chinese market through the acquisition of privately held Zuellig Pharma China (locally known as “Yong Yu”), the largest pharmaceutical importer in China.

However, the company faces tough competition across all its business segments, which may continue to pressure pricing and margins. Its major competitors in the pharmaceutical supply chain segment include McKesson Corp. (NYSE:MCK) and AmerisourceBergen Corp. (NYSE: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 gradually drive margin expansion from current depressed levels.

Cardinal Health’s generic business showed continued signs of strength. Growth in this business continues to surpass the market growth rate. The company expects its generic business to gain further momentum later in fiscal 2011 and 2012. Our Neutral recommendation on the stock is supported by a Zacks #3 Rank (Hold).