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 figure of 61 cents. Net income from continuing operations (as reported) grew 11% year over year to $249.5 million (or 71 cents a share).

Highlights from the Third Quarter

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 Pharmaceutical segment reported third-quarter revenues of $23.8 billion, up approximately 7% year over year, including substantial contribution from prior acquisitions. The business experienced a 21% increase in sales to non-bulk customers. Revenues from the company’s Source generic program jumped 32%. 

Revenues from the Medical segment were $2.23 billion in the third quarter, up 5%, due to higher sales to pre-existing clients, particularly in the Lab and Ambulatory channels.  

We have discussed the quarterly results at length here: Cardinal Beats on All Fronts

Agreement – Estimate Revisions

The overall trend in estimate revisions for fiscal 2011 is overwhelmingly inclined on the positive side following the release of the third-quarter results. Out of the 16 analysts covering the stock, 14 have raised their estimates over the past month with no downward revisions. There was no movement in the preceding 7 days. A similar trend applies for 2012, with 13 analysts (out of 18) raising their forecast with only two instances of negative revisions. There was again no action in the prior week.  

Magnitude – Consensus Estimate Trend

Upward directional agreement, for the most part, has led to an increase of 6 penny and 4 penny in the forecast for 2011 and 2012, respectively, during the last 30 days.  The current Zacks Consensus Estimate for 2011 is $2.66, reflecting an estimated 19.88% year-over-year growth.     

Cardinal Stays at Neutral

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 in 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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