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Cardinal Remains Neutral

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We maintain our recommendation on Cardinal Health (CAH - Free Report) at Neutral. The company posted first-quarter fiscal 2013 adjusted (excluding one-time charges and gains) earnings per share from continuing operations of 81 cents, thereby beating the Zacks Consensus Estimate by 2 pennies as well as the year-ago earnings of 73 cents per share.

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 conversions from branded to generic in the pharmaceutical industry.

Pharmaceutical segment which is Cardinal’s mainstay, witnessed 4% year over year decline in revenues, grossing $23,498 million in the quarter. Sales from the smaller Medical segment clambered 1% to $2,393 million.

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. The 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 Corporation (MCK - Free Report) and AmerisourceBergen Corporation (ABC - Free Report) .

The stock carries a Zacks #3 Rank, which translates into a short-term Hold rating.

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