Cardinal Health, Inc. (CAH) reported better than expected results for its fiscal third quarter, prompting management to raise its guidance for the remainder of the year. Analysts also revised their estimates higher, sending the stock to a Zacks #2 Rank (Buy).
Earnings growth appears to be strong based on current consensus estimates. EPS is forecasted to grow a solid 20% in 2011 and 14% in 2012. In addition to this growth, the company pays a dividend that yields 1.9%. Cardinal Health has been aggressively raising this dividend over the last decade at an average annual clip of 24%.
Valuation is attractive too with shares trading around 15x forward earnings, a significant discount to the industry average of 22x.
Company Description
Cardinal Health is a healthcare solutions company that provides health care products and services. It reports its results in two segments: Pharmaceutical and Medical.
The company is headquartered in Dublin, Ohio and has a market cap of $16.3 billion.
Third Quarter Results
Cardinal Health reported better than expected results for its fiscal third quarter. Earnings per share came in at 75 cents, beating the Zacks Consensus Estimate by 6 cents. It was a 23% increase over the same quarter in 2010.
Revenue rose 7% year-over-year to $26.071 billion, which beat the consensus estimate of $25.629 billion. The Pharmaceutical segment, which accounted for 91% of total revenue, saw sales increase 7% due in large part to acquisitions. The Medical segment, which accounted for the other 9%, saw a 5% increase in sales due to increased volume from existing customers.
The gross profit margin expanded from 4.1% of revenue to 4.5%, which helped drive a 22% increase in operating earnings.
Raised Guidance
It’s always good to see a company raise its guidance coming off a strong quarter. That’s exactly what management at Cardinal Health did following its solid third quarter. The company now expects to earn between $2.61 and $2.67 per share in 2011, up from previous guidance of $2.54 to $2.60.
Analysts revised their estimates higher as well, which sent the stock to a Zacks #2 Rank (Buy). The 2011 Zacks Consensus Estimate increased to $2.66, representing 20% growth over 2010 EPS. The 2012 consensus estimate rose to $3.02, corresponding with 14% EPS growth.
Raised Dividend
In June the company raised its quarterly dividend by 10% to 21.5 cents per share. It currently yields 1.9%.
Cardinal Health has a solid balance sheet and strong cash flow which has allowed it to significantly raise its dividend over the last decade. Since 2001 the company has increased its dividend at a remarkable compound annual growth rate of 24.4%:
Valuation
The valuation picture looks attractive too. Shares trade at 15.3x 12-month forward earnings, a significant discount to the industry average of 22.4x. It’s also at a slight discount to its 10-year median of 15.5x.
Its price to book ratio of 2.8 is in-line with the industry average.
The Bottom Line
Cardinal Health offers investors strong earnings growth potential and a rapidly rising dividend. With earnings estimates increasing and valuation at reasonable levels, now could be the time to get in.
Todd Bunton is the Growth & Income Stock Strategist for Zacks.com.
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