Cardinal 2Q Tops, Profit Rises

Leading distributor of pharmaceuticals and medical supplies Cardinal Health ( CAH - Analyst Report ) posted second-quarter fiscal 2012 (ended December 31) adjusted (excluding one-time charges and gains) earnings per share from continuing operations of 81 cents, surpassing the Zacks Consensus Estimate of 76 cents and the year-ago earnings of 73 cents per share.

Earnings from continuing operations (as reported) increased about 23% year over year to $264.4 million (or 76 cents a share).

Revenues

Sales in the second quarter increased 7% year over year to $27.1 billion, beating the Zacks Consensus Estimate of $26.9 billion. Sales were boosted by growth across the board.

Segment Highlights

The Pharmaceutical segment recorded revenues of $24.7 billion in the quarter, a 6% year-over-year increase. Acquisitions contributed to growth as did organic growth from pre-existing clients.

Sales from the smaller Medical segment moved up 9% year over year to $2.4 billion in the quarter, driven by higher sales to existing and net new clients and robust volume of preferred products.

Margins

Gross margin for the second quarter moved up slightly to 4.1% from 3.9% a year ago. Company-wide adjusted operating earnings increased 21% year over year to $475 million in the quarter. Pharmaceutical segment profit rose 30% year over year to $394 million, reflecting robust performance by generics, the impact of new product launches and contributions from acquisitions concluded in fiscal 2011. Segment profit margin stood at 1.60%, up from 1.31% in the prior-year quarter.

For the Medical segment, profit declined 18% to $85 million as higher investments in IT and pressure from higher commodity prices were only partly offset by enhanced profitability from Cardinal’s preferred products program. Segment profit margin was 3.50%, lower than 4.67% in the year-ago quarter.

Balance Sheet, Cash Flow and Dividend

Cardinal exited the quarter with cash and equivalents of about $1.8 billion, up 33.4% year over year. Long-term obligations moved down 4.3% year over year to $2.7 billion.

Guidance and Outlook

Looking ahead, Cardinal upwardly revised its adjusted earnings per share from continuing operations guidance to a band between $3.10 and $3.20 (from $3.04 and $3.19 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 - Analyst Report ) and AmerisourceBergen Corp. ( ABC - Analyst Report ) . We currently have a long-term Outperform rating on Cardinal. The stock currently retains a Zacks #3 Rank, which translates into a short-term “Hold” recommendation.