U.S. Markets closed

Cardinal Tops on Earnings, Ups View

Zacks Equity Research

Cardinal Health Inc. (CAH) posted solid fiscal 2014 first-quarter adjusted earnings of $1.10 per share, which were up 36% from 81 cents earned in the year-ago quarter. Earnings per share comfortably surpassed the Zacks Consensus Estimate of 85 cents by an impressive 29.4%.

On a reported basis, net earnings surged 25% to $340 million or 99 cents per share from $272 million or 79 cents in the year-ago period. Settlements of federal and state tax matters benefited both reported as well as adjusted EPS by 18 cents in the quarter.

Revenues in the first quarter went down 5% to $24,523 million, due to lower revenues from the Pharmaceutical segment. Nonetheless, the top line beat the Zacks Consensus Estimate of $22,680 million.

Gross profit increased 9% from the year-ago quarter to $1,264 million. As a result, gross margin expanded 70 basis points (bps) to 5.2%. Operating earnings improved 3% to $471 million. On an adjusted basis, operating earnings climbed 13% to $532 million. Consequently, adjusted operating margin expanded 40 bps to 2.2%.

Segment Highlights

Cardinal’s mainstay Pharmaceutical segment witnessed a 7% decline in revenues to $21,813 million, owing to non-renewal of the contract with Express Scripts Holding Co. (ESRX). The decline was, however, partly mitigated by expanded customer relationships.

Pharmaceutical segment profits rose 8% to $433 million on the back of the generic wave and robust contributions from the branded manufacturer agreements. Segment profit margin improved to 2.0% from 1.7% a year ago.

Revenues from the smaller Medical segment grew 13% to $2,711 million in the quarter, on the back of the AssuraMed buyout and robust contributions from its strategic hospital network accounts.

Profits from the Medical segment shot up 43% to $106 million, boosted by the takeover of AssuraMed, planned efficiency initiatives along with good performance of preferred offerings. Segment profit margin was 3.9%, up from 3.1% in the prior-year quarter.

Balance Sheet and Cash Flow

Cardinal exited the fiscal first quarter with cash and cash equivalents of about $2,753 million, up 44.8% from $1,901 million as of Jun 30, 2013. Total debt stood at $3,883 million, up 34.9% from $2,879 million as of Jun 30, 2013.

Net cash provided by operating activities was $951 million in the reported quarter, up 67.4% from $568 million in the prior-year quarter. Net capital expenditure was flat year over year at $92 million.

After exhaustion of the $250 million share repurchase program in the fourth quarter, Cardinal announced a new share repurchase program of $1 billion. The latest buyback is over and above the share repurchase program that was approved in Aug 2012, of which $350 million is still available.

For fiscal 2014, CAH raised its forecast for adjusted earnings per share to the band of $3.62 to $3.72 from the earlier guidance of $3.45 to $3.60. Management cited the company’s outstanding fiscal first-quarter results along with efficient operating performance as the reason behind the upgraded guidance. The current Zacks Consensus Estimate of $3.57 for the year lies below the outlook band.

Our Take

We are highly impressed with Cardinal’s strong fiscal first-quarter results, which comfortably beat the Zacks Consensus Estimate at both fronts. Despite lower revenues due to loss of a contract, the company’s margin improvement and favorable business mix led to higher earnings. Moreover, the tax-related settlement with the federal authorities additionally boosted the bottom line in the reported quarter.

Cardinal’s strategy of tuck-in acquisitions is yielding positive results as the AssuraMed acquisition is paying off for the Medical segment. We are also encouraged by the consistent margin improvement as CAH continues to benefit from the introduction of generic drugs in the pharmaceutical industry. The company’s generic program continues to catalyze profitability.

Cardinal currently has a Zacks Rank #2 (Buy). Other stocks from the Medical/Dental Supplies industry such as Align Technology Inc. (ALGN) and McKesson Corp. (MCK) are also worth considering. Both these stocks carry a Zacks Rank #1 (Strong Buy).

Read the Full Research Report on CAH
Read the Full Research Report on ALGN
Read the Full Research Report on MCK
Read the Full Research Report on ESRX

Zacks Investment Research