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Cardinal Health Tops Q3 Earnings, Revenues; '15 View Stays - Analyst Blog

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Cardinal Health (CAH) reported third-quarter fiscal 2015 earnings of $1.19 per share, which beat the Zacks Consensus Estimate by 3 cents and increased 17.8% on a year-over-year basis.

Cardinal Health Inc. - Earnings Surprise | FindTheCompany


Quarter Details

Revenues increased 18.4% to $25.38 billion, well above the Zacks Consensus Estimate of $24.30 billion. Pharmaceutical revenues were up 20.5% to $22.61 billion driven by growth in customer base. Revenues from Medical segment increased 4.4% to $2.8 million, primarily driven by higher contribution from acquisitions.

Reported gross margin contracted 30 basis points (bps) on a year-over-year basis to 5.7%.

Distribution, selling, general and administrative (SG&A) expenses, as a percentage of revenues, decreased 20 bps year over year to 3.2% in the quarter.

Adjusted operating margin remained flat on a year-over-year basis to 2.6%. Pharmaceutical operating profit margin increased 10 bps on strong performance by the company's generics program, which includes the net benefit of Red Oak Sourcing as well as growth from existing and new customers.

Medical operating profit margin decreased approximately 50 bps from the year-ago quarter, primarily attributed to lower contribution from national brand distribution and weakness in Canada.

At the end of the third quarter, Cardinal Health had cash and cash equivalents of $3.18 billion. Long-term obligations were $4 billion and the net debt to capital ratio stood at 11%.

Acquisition News

During the quarter, the company announced plans to acquire Cordis, a unit of Johnson & Johnson JNJ, for approximately $1.944 billion in cash ($1.594 billion net of tax benefits). Fremont, CA-based Cordis offers cardiology and endovascular devices like stents, catheters, wires, guides and balloons. The division accounted for almost $780 million in sales in 2014, of which 70% was generated from outside the U.S. Cordis has operations in more than 50 countries worldwide.

The Cordis business will be integrated into Cardinal Health’s Medical Segment, which reported revenues of $2.9 million in the second quarter of 2015. Management has identified orthopaedics, wound management and cardiology as the core focus area post the acquisition.

Cardinal Health expects the deal to add 20 cents (including 7 cents to 8 cents of interest expense) to fiscal 2017 adjusted EPS and save $100 million in annual costs by the end of fiscal 2018.


Cardinal Health expects non-GAAP earnings in the range of $4.28 to $4.38 per share for fiscal 2015.

Our Take

Cardinal Health is banking on strategic buyouts, joint ventures and supply agreements to drive growth. We believe that the Red Oak sourcing venture with CVS Health CVS presents a significant growth opportunity. Moreover, the long-term strategic agreement with Henry Schein HSIC, signed in Nov 2014, as well as the contract manufacturing agreement with Bayer Healthcare, signed in the second quarter of fiscal 2015, presents significant growth opportunities.

Furthermore, we believe that growth in new and existing customers as well as consistent stock repurchases will boost earnings. However, increasing competition is a major concern. Moreover, the company largely depends on selected customers as well as GPOs to generate a sizeable portion of its revenues, which exposes it to substantial risk in case of a loss of relationship with the customers or agents.    

Currently, Cardinal Health carries a Zacks Rank #3 (Hold).

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