Cardinal Health (CAH) is slated to report its third-quarter fiscal 2011 (ending March) results on Thursday, April 28. The company expects earnings per share in the range of $2.54 to $2.60 for fiscal 2011. The current Zacks Consensus Estimate for revenues and earnings for the third quarter are $25.6 billion and 69 cents per share, respectively.
Second Quarter Recap
Cardinal Health reported second-quarter fiscal 2011 adjusted earnings per share of 69 cents, beating the Zacks Consensus Estimate of 61 cents and surpassing the year-ago results of 57 cents. Total sales were up 2% year over year to $25.4 billion, beating the Zacks Consensus Estimate. Higher sales from the core Pharmaceutical division were partly offset by a modest decline in the Medical segment.
Revenues from the larger Pharmaceutical segment moved up 2% year over year to $23.2 billion, primarily the result of a 6% increase in sales to non-bulk customers. Revenues from the company’s Source generics program jumped 31%.
Revenues from the Medical segment were $2.2 billion in the first quarter, dipping 1% partly due to the robust and early flu season in the year-ago quarter
Estimate Revision Trend
Agreement
Estimates for the third quarter have been largely stagnant. Out of a total of 17 analysts covering the stock, only 1 changed his/her estimate in the upward direction over the last 7 days with no downward revisions. There were 2 positive revisions and 1 negative revision over the past 30 days.
With regard to estimates for fiscal 2011, 2 analysts (out of 18) raised their estimates over the past week with no reverse movement. There were three positive revisions and one negative revision during the past month. The current Zacks Consensus Estimate for fiscal 2011 is $2.59, representing an estimated 16.82% year-over-year increase.
Magnitude
The magnitude of estimate revision for the third quarter, as well as fiscal 2011, has been static over the prior week and past month.
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 10.73% 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 (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. (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 gradually help 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).
AMERISOURCEBRGN (ABC): Free Stock Analysis Report
CARDINAL HEALTH (CAH): Free Stock Analysis Report
CAREFUSION CORP (CFN): Free Stock Analysis Report
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