Cardinal Health Inc. has a hole in its earnings through fiscal 2014 after the health care products distributor failed to renew a key contract to supply drugstore chain Walgreen Co., according to a Citi analyst who lowered his rating on Cardinal shares.
Cardinal's $2 billion acquisition of medical supplies distributor AssuraMed should partially fill that hole, analyst George Hill said in a Wednesday morning research note. But he said that Cardinal probably won't see meaningful earnings-per-share growth for more than a year, "leading us to believe the shares may be dead money until another catalyst appears."
Hill lowered his rating on the stock to "Neutral" from "Buy" and reduced his target price to $43 from $47.
Cardinal, based in Dublin, Ohio, distributes pharmaceuticals and medical supplies and makes products like gloves and gowns for surgery. It supplies branded pharmaceuticals to Walgreen, the nation's largest drugstore chain. But the Walgreen contract ends in August. Walgreen said Tuesday that, instead of a renewal, it will extend an agreement with Cardinal competitor AmerisourceBergen Corp.
Walgreen is one of Cardinal's two biggest customers, and the company said it generated about 21 percent of fiscal 2012 revenue.
Hill noted that Cardinal also faces an expiring contract with its biggest client, the drugstore chain and pharmacy benefits manager CVS Caremark Corp. That deal ends in June.
"We believe Cardinal now has less leverage in negotiating with CVS and could be forced to be more flexible on price to retain the contract," Hill wrote.
Cardinal also received a downgrade from Lazard Capital Markets analyst Tom Gallucci, who on Tuesday lowered his rating on the shares to "Neutral" from "Buy."
In contrast, Hill and other analysts raised their ratings on Walgreen and AmerisourceBergen shares.
Cardinal shares rose 5 cents to $42.40 in premarket trading Wednesday after dropping about 8 percent in heavy trading on Tuesday.