Cardinal Reaffirmed at Neutral

We maintain our Neutral recommendation for Cardinal Health (CAH), one of the largest distributors of pharmaceuticals and medical supplies. Earnings for fourth-quarter fiscal 2010 beat the Zacks Consensus Estimate by a penny. However, profit dipped year-over-year, impacted by the spin-off of the company’s non-core Clinical and Medical Products segment (CareFusion), lower customer pricing and supply disruption in the pharmaceutical segment.

Revenues grew by a mere 0.5% year-over-year to $22.3 billion, narrowly missing the Zacks Consensus Estimate. Pharmaceutical revenues were essentially flat year-over-year as higher sales to non-bulk customers were offset by lower bulk customer revenues. On a positive note, the company’s generic pharmaceutical business posted a 10% revenue growth in the quarter.

Cardinal is one of the largest global healthcare companies that help pharmacies, hospitals and ambulatory care sites to focus on low-cost patient care. It is also a leading manufacturer of medical and surgical products. Cardinal has a diversified product portfolio – a natural hedge against the risk of revenue shortfall in a volatile economy.

The spin-off of CareFusion has enabled Cardinal to increase focus on its core healthcare supply chain business. Moreover, Cardinal recently acquired privately-held specialty pharmaceutical services company Healthcare Solutions Holding for $667 million. The acquisition has expanded its foothold in the fast-growing specialty pharmaceutical services segment.

However, Cardinal is facing tough competition across all its business segments, which may pressure pricing. Its major competitors in the pharmaceutical supply chain segment are McKesson Corp. (MCK) and AmerisourceBergen Corp. (ABC). Cardinal is experiencing margin pressure in its pharmaceutical business, in part, due to competition. Moreover, a slowdown in certain sales channels (such as hospital and physician office channels) due to lower customer demand is also a concern.

Nevertheless, Cardinal remains committed to boosting shareholder returns leveraging a solid cash flow as it continues share repurchases and pays incremental dividends. Moreover, the company has lifted its earnings guidance for fiscal 2011 assuming several large customer contract renewals and improvement in generic revenues.

CARDINAL HEALTH (CAH): Free Stock Analysis Report

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