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Why Is Cardinal (CAH) Down 12.5% Since Last Earnings Report?

Zacks Equity Research
Pzena (PZN) delivered earnings and revenue surprises of 0.00% and -3.29%, respectively, for the quarter ended June 2019. Do the numbers hold clues to what lies ahead for the stock?

It has been about a month since the last earnings report for Cardinal Health (CAH). Shares have lost about 12.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Cardinal due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Cardinal Health Q3 Earnings Top Estimates, Revenues Lag

Cardinal Health Inc. delivered third-quarter fiscal 2019 adjusted earnings of $1.59 per share, which surpassed the Zacks Consensus Estimate of $1.43 by 11.2%. Further, the reported figure improved 14.4% year over year.

Revenues increased 4.7% on a year-over-year basis to $35.3 billion but missed the Zacks Consensus Estimate by 0.1%.

Segmental Analysis

Pharmaceutical Segment

In the fiscal third quarter, pharmaceutical revenues increased 5.5% to $31.36 billion on a year-over-year basis. The upside can be attributed to sales growth from Pharmaceutical Distribution and Specialty Solutions customers.

Pharmaceutical witnessed a decline of 10.1% in profits to $536 million owing to a negative impact from the company's generics program performance. However, better performance at Specialty Solutions partially offset the downside.

Medical Segment

In the quarter under review, revenues at this segment decreased 1.1% to $3.87 billion. The downside can be attributed to the divestitures of the China distribution and naviHealth businesses. However, growth from existing customers mitigated the downside.

Medical segment profits decreased 22.1% to $155 million owing to performance of Cardinal Health Brand products.

Margin Analysis

Gross profit fell 7.8% year over year to $1.76 billion.

As a percentage of revenues, gross margin in the quarter was 5%, down 70 bps on a year-over-year basis.

Distribution, selling, general and administrative expenses totaled $1.09 billion, down 3.1% year over year. Adjusted operating income totaled $667 million, down 14.6% from the year-ago quarter.

Operating margin for Cardinal Health in the quarter under review was 1.2% of net revenues, down 40 bps.

Financial Update

As of Mar 31, 2019, cash and cash equivalents amounted to $3.43 billion, soaring 95% from the 2018-end level.

Cash from operating activities totaled $1.48 billion, up 95.3% from the year-ago quarter.

Dividend Update

The board of directors of Cardinal Health approved a dividend hike of 1% with the raised dividend amounting to 48.11 cents per share or $1.92 on annualized basis. The dividend will be paid on Jul 15, 2019, to shareholders on record as of Jul 1, 2019.     

Guidance

The company raised the lower end of guidance for fiscal 2019 adjusted earnings per share.

Adjusted earnings from continuing operations are now expected in the range of $5.02-$5.17, up from $4.97-$5.17 projected earlier. The mid-point of the latest guidance range of $5.09 beats the Zacks Consensus Estimate of $5.08.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -13.12% due to these changes.

VGM Scores

At this time, Cardinal has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Cardinal has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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