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Leading distributor of pharmaceuticals and medical supplies Cardinal Health (CAH - Analyst Report) posted first-quarter fiscal 2013 adjusted (excluding one-time charges and gains) earnings per share from continuing operations of 81 cents, thereby beating the corresponding Zacks Consensus Estimate by a couple of cents as well as the year-ago earnings of 73 cents per share.

Earnings from continuing operations (as reported) increased 15% year over year to $272 million (or 79 cents a share) in the first quarter. Net earnings were $271 million, up 15% year over year.

Revenues

Revenues in the first quarter were $25,889 million, down 3% on a year-over-year basis, trailing the Zacks Consensus Estimate of $26,587 million. The decline in revenues was in-line with Cardinal’s expectation due to the prominent brand-to-generic conversions in the pharmaceutical industry.

Segment Highlights

Pharmaceutical segment which is Cardinal’s mainstay, witnessed 4% year over year decline in revenues, grossing $23,498 million in the quarter, owing to brand-to-generic conversions. The improvement in specialty solutions volume and new customers partially negated the impact of the conversions.

Sales from the smaller Medical segment clambered 1% year over year to $2,393 million in the quarter, on the back of higher sales of preferred offerings and contributions from the Futuremed acquisition.

Margins

Gross margin in the first quarter edged up to 4.5% from 4.0% in the year-ago quarter. Company-wide operating earnings increased 11% year over year to $457 million in the quarter.

Pharmaceutical segment profit surged 10% year over year to $400 million, reflecting robust performance by generics. Segment profit margin improved to 1.70%, up from 1.49% in the prior-year quarter.

Profit for the Medical segment dipped 6% to $74 million due to decline in volume and issues associated with information systems. Segment profit margin was 3.11% in the quarter, lower than 3.32% in the year-ago quarter.

Balance Sheet

Cardinal exited first quarter with cash and equivalents of about $2,440 million, up 21.4% year over year. Long-term obligations (without current portion) increased 9.7% year over year to $2,408 million.

Guidance

For fiscal 2013, Cardinal reiterated its forecast for adjusted earnings per share from continuing operations in a band of $3.35 and $3.50.

Cardinal Health is ranked among Fortune 500 companies. With over $100 billion in annual sales, the company 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.

Cardinal stands to gain from the gradual shift in mix from bulk to the higher margin non-bulk sector of the Pharmaceutical segment. Its mainstay Pharmaceutical segment is heavily influenced by the generic wave. Overall, Cardinal is benefiting from a spate of tuck-in acquisitions and capital deployment strategies. The company continues to deploy capital to boost investor confidence via share repurchases and dividend hikes.

However, Cardinal 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 ‘Neutral’ recommendation on Cardinal. The stock carries a Zacks #3 Rank, which translates into a short-term Hold rating.

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