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Tickers in this Article: ABC, CAH, MCK
Leading distributor of pharmaceuticals and medical supplies Cardinal Health (CAH) posted third-quarter fiscal 2012 (ended March 31) adjusted (excluding one-time charges and gains) earnings per share from continuing operations of 94 cents, beating the Zacks Consensus Estimate of 88 cents and the year-ago earnings of 81 cents per share. Earnings from continuing operations (as reported) were up about 33% year over year to $332.5 million (or 95 cents a share).

Revenues

Revenues in the third quarter increased 3% year over year to $26.9 billion, beating the Zacks Consensus Estimate of $26.6 billion.

Segment Highlights

The Pharmaceutical segment recorded revenues of $24.5 billion in the quarter, a 3% year-over-year increase, due to growth among pre-existing clients.

Sales from the smaller Medical segment moved up 8% year over year to $2.4 billion in the quarter, driven by higher sales of preferred offerings.

Margins

Gross margin for the third quarter moved up slightly to 4.2% from 4.1% a year ago. Company-wide adjusted operating earnings increased 6% year over year to $524 million in the quarter.

Pharmaceutical segment profit rose 9% year over year to $446 million, reflecting robust performance by generics and recent offerings. Segment profit margin stood at 1.82%, up from 1.73% in the prior-year quarter.

For the Medical segment, profit declined 17% to $89 million as higher investments in IT and pressure from higher commodity prices were only partly offset by enhanced profitability from Cardinal's preferential products program. Segment profit margin was 3.70%, lower than 4.84% in the year-ago quarter.

Balance Sheet, Cash Flow and Dividend

Cardinal ended the quarter with cash and equivalents of about $2.4 billion, up 22.8% year over year. Long-term obligations (without current portion) moved down 6.6% year over year to $2.2 billion.

Guidance and Outlook

Cardinal revised its adjusted earnings per share from continuing operations guidance to a band between $3.15 and $3.20 (from $3.10 and $3.20 earlier) for fiscal 2012.

Cardinal Health is ranked in the Fortune 500. With over $100 billion in annual sales, Cardinal Health remains one of the largest distributors of pharmaceuticals and medical supplies in the U.S., with a diversified product portfolio, which may partly insulate it from the current economic uncertainty. The company stands to gain from the gradual shift in mix from the bulk to the higher-margin non-bulk sector of the Pharmaceutical segment. It is also riding the generic wave. Overall, Cardinal is benefiting from a spate of tuck-in acquisitions and capital deployment strategies.

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 currently have a long-term Neutral rating on Cardinal. The stock currently retains a Zacks #3 Rank, which translates into a short-term "Hold" recommendation.

 
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