Cardinal Health (CAH) reported third-quarter fiscal 2011 (ended March 31) adjusted (excluding one-time expenses) earnings per share of 75 cents, exceeding the Zacks Consensus Estimate of 69 cents as well as the year-ago earnings of 61 cents per share. Net income from continuing operations (as reported) grew 11% year over year to $249.5 million (or 71 cents a share).
Revenues
Total revenues were $26.1 billion in the reported quarter, up about 7% year over year, beating the Zacks Consensus Estimate of $25.6 billion. The company benefited from higher sales in both its segments.
Segment Revenue
The larger Pharmaceutical segment reported third quarter revenues of $23.8 billion, up 7% year over year, including notable contribution from acquisitions completed earlier during the financial year. The business experienced a 21% increase in sales to non-bulk customers. Revenues from the company’s Source generics program jumped 32%.
Revenues from the Medical segment were $2.23 billion in the third quarter, up 5%, primarily due to higher sales to pre-existing clients, particularly in the Lab and Ambulatory channels.
Margin
Company-wide adjusted operating earnings were $466 million in the reported quarter, up 21% year over year. Pharmaceutical segment profit was $384 million, up 25%, primarily due to improved performance by generics including the impact of generic launches.
Acquisitions contributed 600 basis points to segment growth during the quarter. Segment profit margin was 1.61%, up from 1.38% in the year-ago quarter.
For the Medical segment, profit was $107 million, down less than 1% on a year-over-year basis, as growth in volume was offset by the negative impact of higher commodity prices. Product mix also had a negative impact on profitability. Segment profit margin was 4.80%, down from 5.08% in the year-ago quarter.
Balance Sheet and Cash Flow
Cash and equivalents totaled $1.96 billion, as of March 31, down 25.7% year over year. Long-term obligations amounted to $2.4 billion, up 25.9%.
Outlook
Encouraged by its year-to-date performance, the company revised its guidance for adjusted earnings per share for fiscal 2011 to a range of $2.61 to $2.67 from $2.54 to $2.60.
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.
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.
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 help gradually drive margin expansion from current depressed levels. Our long-term Neutral recommendation on the stock is supported by a Zacks #3 Rank (Hold).
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