Cardinal Health (CAH) reported first-quarter fiscal 2011 (ended September 30) adjusted (excluding one-time expenses) earnings per share of 64 cents, exceeding the Zacks Consensus Estimate of 53 cents as well as the year-ago figure of 54 cents.
Total revenue was $24.4 billion in the reported quarter, down about 1% year over year. Reported results were also below the Zacks Consensus Estimate of $25.1 billion.
Segment Revenue
The Pharmaceutical segment reported first-quarter revenue of $22.3 billion, down approximately 1% year over year, partly as a result of lower sales to pre-existing bulk customers. Generic pharmaceutical sales were up 19% while revenue from the company’s Source generics program jumped 34%.
Revenue from the Medical segment was $2.2 billion in the first quarter, dipping 3% partly due to the early outbreak of flu season in the year-ago quarter.
Company-wide adjusted operating earnings were $372 million in the reported quarter, up 15% year over year. Pharmaceutical segment profit was $296 million, up 42%, primarily due to improved performance by generics and better results from branded manufacturing agreements. Segment profit margin was 1.33%, up from 0.92% in the year-ago quarter.
For the Medical segment, profit was $83 million, down 28%, partly due to the impact of commodity price increases on cost of products sold in the reported quarter. Segment profit margin was 3.82%, down from 5.13% in the year-ago quarter.
Balance Sheet and Cash Flow
Cash and equivalents totaled $2.7 billion, as of September 30, up 71.2% year over year. Long-term obligations amounted to $1.9 billion, down 9.4%.
Outlook
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.
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 for the long term. The stock currently retains a Zacks #4 Rank, which translates into a short-term Sell recommendation.
CARDINAL HEALTH (CAH): Free Stock Analysis Report
Zacks Investment Research
