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Cardinal and WAG Contract to End

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Leading distributor of pharmaceutical and medical supplies, Cardinal Health (CAH - Free Report) recently revealed that its pharma distribution agreement with Walgreen Co. would lapse at the end of Aug 2013.

Following the non-renewal of the contract, Cardinal guides that its adjusted earnings per share (from continuing operations) for fiscal 2014 will approximately be in line with its fiscal 2013 forecast of $3.42–$3.50 per share. The company will provide more clarity to its fiscal 2014 forecast later. Its guidance for fiscal 2013 remains unchanged as the Walgreens contract remains in vogue during this period.    

Walgreens was one of Cardinal’s largest clients and accounted for about 21% of its aggregate revenues in fiscal 2012. Cardinal’s bulk sales carry much lower margin than non-bulk sales. Approximately 60% of Cardinal’s sales derived from the Walgreens account were bulk in nature. Furthermore, bulk and non-bulk revenues from Walgreens carry much lower segment profit, as a proportion of segment sales, than average sales in either category.

Based on factors such as overall drop in working capital, the expiration of the Walgreens contract will benefit Cardinal’s after-tax operating cash flow.  

Cardinal Health is ranked among the Fortune 500 companies. With about $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 economic fluctuations.

Cardinal Health 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 Health 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 Health faces tough competition across all its business segments, which may continue to pressure pricing and margins.

Cardinal Health currently carries a Zacks Rank #2 (Buy). Rite Aid Corporation (RAD - Free Report) and PharMerica Corporation both carry a Zacks Rank #1 (Strong Boy) and are expected to do well.

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