Leading distributor of pharmaceuticals and medical supplies Cardinal Health (CAH) posted second-quarter fiscal 2013 adjusted (excluding one-time charges and gains) earnings per share from continuing operations of 93 cents, thereby beating the Zacks Consensus Estimate of 85 cents as well as the year-ago earnings of 81 cents per share.
Net earnings were $303 million (88 cents per share), up 16% year over year.
Revenues
Revenues in the fiscal second quarter were $25,232 million, down 7% on a year-over-year basis, beating the Zacks Consensus Estimate of $24,598 million. The decline in revenues was due to the prominent brand-to-generic conversions in the pharmaceutical industry as well as failure to renew the contract with Express Scripts Holding Company (ESRX).
Segment Highlights
Pharmaceutical segment which is Cardinal’s mainstay, witnessed 8% year over year decline in revenues, grossing $22,747 million in the quarter, owing to brand-to-generic conversions as well as non-renewal of contract with Express Scripts. The decline was partly offset by new clients.
Sales from the smaller Medical segment clambered 3% year over year to $2,487 million in the quarter, on the back of an extra day of sales and contributions from the Futuremed acquisition.
Margins
Gross margin in the fiscal second quarter edged up to 4.9% from 4.1% in the year-ago quarter. Company-wide adjusted operating earnings increased 10.5% year over year to $525 million in the quarter.
Pharmaceutical segment profit surged 12% year over year to $441 million, reflecting robust performance by generics partly offset by weakness in the nuclear operation. Segment profit margin improved to 1.9%, up from 1.6% in the prior-year quarter.
Profit for the Medical segment improved 11% to $94 million. Segment profit margin was 3.8% in the quarter, higher than 3.5% in the year-ago quarter on account of positive effect of acquisitions, preferred products and commodity prices partly offset by weakness in volumes and client mix.
Balance Sheet
Cardinal exited fiscal second quarter with cash and equivalents of about $2,255 million, roughly flat since the start of the fiscal year on July 1, 2012. Long-term obligations (without current portion) stood at $2,423 million, on December 31, 2012, roughly flat over the same time frame.
Guidance
For fiscal 2013, Cardinal narrowed its forecast for adjusted earnings per share from continuing operations to a band of $3.42 and $3.50 from $3.35 to $3.50 earlier.
Cardinal Health is ranked among Fortune 500 companies. With over $100 billion in annual sales, the company remains one of the largest distributors of pharmaceuticals and medical supplies in the U.S., with a diversified product portfolio, which may partly insulate it from the current economic uncertainty.
Cardinal stands to gain from the gradual shift in mix from bulk to the higher margin non-bulk sector of the Pharmaceutical segment. Its mainstay Pharmaceutical segment is heavily influenced by the generic wave. Overall, Cardinal is benefiting from a spate of tuck-in acquisitions and capital deployment strategies. The company continues to deploy capital to boost investor confidence via share repurchases and dividend hikes.
However, Cardinal faces tough competition across all its business segments, which may continue to pressure pricing and margins.
Cardinal Health currently carries a Zacks Rank #3 (Hold) rating. Rite Aid Corporation (RAD) and AmerisourceBergen Corporation (ABC) carry Zacks Rank #1 (Strong Boy) and Zacks Rank #2 (Buy) ratings, respectively, and are expected to do well.
AMERISOURCEBRGN (ABC): Free Stock Analysis Report
CARDINAL HEALTH (CAH): Free Stock Analysis Report
EXPRESS SCRIPTS (ESRX): Free Stock Analysis Report
RITE AID CORP (RAD): Free Stock Analysis Report
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