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What's in Store for Cardinal Health (CAH) in Q4 Earnings?

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Cardinal Health, Inc’s (CAH - Free Report) fourth-quarter fiscal 2018 results are scheduled for release on Aug 6, before the market opens. While results are likely to project impressive growth in the core Pharmaceutical segment, lackluster performance in the Cordis unit is likely to mar prospects.

In the last reported quarter, the company reported adjusted earnings of $1.39 per share, which missed the Zacks Consensus Estimate of $1.51. Adjusted earnings fell 9% year over year. Revenues increased 6% on a year-over-year basis to almost $33.63 billion and edged past the Zacks Consensus Estimate of $33.60 billion. Notably, Cardinal Health has an average earnings surprise of 5.1% in the trailing four quarters.

For the quarter to be reported, the Zacks Consensus Estimate for earnings is pegged at 93 cents per share, reflecting a decline of 29% year over year. The same for revenues is pinned at $34.55 billion, indicating growth of 4.8%.

Let’s delve deeper.

Cardinal Health, Inc. Price and Consensus

 

Pharmaceutical Segment to Drive Results

In the last reported quarter, this segment accounted for 88.5% of the company’s revenues. Pharmaceutical revenues increased 5% to $29.72 billion on a year-over-year basis.

The segment is likely to register strong growth in the Specialty business and gain a large number of Pharmaceutical Distribution customers. In fact, the Zacks Consensus Estimate for revenues is pegged at $30.69 billion, showing a rise of 3.8% year over year.

However, the segment witnessed expiration of a large, mail-order customer contract along with the divestiture of the company's China distribution business. This is likely to have an adverse impact on fourth-quarter profits from the segment. Notably, Pharmaceutical witnessed a 3% decline in profits to $596 million, thanks to generic pharmaceutical pricing. We expect the trend to continue in the quarter to be reported as well.

Other Factors at Play

Medical Segment

In the fiscal third quarter, this segment accounted for 11.5% of the company’s revenues.

Solid prospects in Cardinal Health at-Home, lab and services units are likely to boost the segment’s revenues. In the last reported quarter, revenues in the segment improved 15% to $3.92 billion, primarily on higher contributions from new and existing customers along with the acquisition of the Patient Recovery business. Profits in the Medical segment increased 34% to $199 million in the third quarter, courtesy of higher contributions from new and existing customers as well as acquisition of the Patient Recovery business.

For the quarter to be reported, the Zacks Consensus Estimate for revenues of the segment is pegged at $4.03 billion, up 17.9% year over year.

Medical Gloves Unit in Troubled Waters

Cardinal Health offers a robust portfolio of medical gloves including surgical gloves, exam gloves and clean-room gloves. The company has been lately facing challenges in the exam-glove sub-segment. In the last reported quarter, commodity pricing and supply disruptions were major drags for the section.

For the fourth quarter, lower expectations in the Medical segment due to a troubled exam-gloves segment are concerns.

Cordis Unit Lacks Luster

Cardinal Health took over Johnson and Johnson’s Cordis unit for $1.94 billion in 2015 to enhance the top line. However, by the end of the third quarter of fiscal 2018, things have not been going downhill for the company, especially in the Cordis unit.

The unit’s performance not only lowered the company’s adjusted operating earnings, but created a higher-than-expected adjusted effective tax rate (19 cents per share). Of this, Cordis-related increased tax-rate was 13 cents per share.

Considering this, the company expects a very challenging time ahead in fiscal 2019. Per management, despite prospects in the Patient Recovery in Red Oak and subsequent U.S. tax reform, the company will face significant headwinds from customer repricing, the loss of PharMerica and persistent generic deflation.

Consequently, Cardinal Health is not expected to achieve the 6% margin rate in the second half of fiscal 2018.

What Does Our Model Predict?

Per our proven model, a stock needs to have a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to deliver a positive earnings surprise. This is not the case here as you will see below.

Earnings ESP: Cardinal Health has an Earnings ESP of -0.86%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Cardinal Health carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Please note that we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revision.

Stocks Worth a Look

Here are a few medical stocks worth considering as they have the right combination of elements to post an earnings beat this quarter.

AbbVie Inc (ABBV - Free Report) has an Earnings ESP of +0.15% and a Zacks Rank of 3.

Acorda Therapeutics, Inc (ACOR - Free Report) has an Earnings ESP of +66.76% and a Zacks Rank of 2.

athenahealth, Inc (ATHN - Free Report) has an Earnings ESP of +8.82% and a Zacks Rank of 3.

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