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Cardinal Health Aflutter

Third-quarter numbers improve, but shares fall.

Cardinal Health's

(CAH) - Get Cardinal Health, Inc. Report

still healing.

Strong results from Cardinal's big drug distribution business pushed the company past Wall Street revenue expectations for the first quarter.

Some smaller divisions continued to struggle, however, and shares slipped 1.6% early Friday.

During the latest quarter, Cardinal's revenue climbed 11% to $21.4 billion, topping the consensus estimate by $100 million. Net income rose 19% to $271 million during the latest period. Meanwhile, earnings per share -- excluding a 4-cent tax gain -- came in at 73 cents, missing the consensus estimate by 3 pennies.

"Overall, we view the results as lackluster," wrote JP Morgan analyst Lisa Gill. But "we continue to believe in the long-term fundamentals of the company and would be buyers on any weakness."

Gill has an overweight rating on Cardinal's stock. Her firm has an investment banking relationship with the company.

Cardinal's drug supply division, helped by generic sales and ongoing cost controls, drove much of that success. But the company gave credit to its other business units as well.

"Our other segments contributed more than 40% of total operating earnings," Cardinal CEO Kerry Clark noted, "reflecting the diversity of our healthcare products and services and highlighting a key differentiator Cardinal Health brings to both customers and shareholders."

Cardinal's drug supply business saw third-quarter revenue jump by 12% and profits grow at twice that rate despite continued sell-margin pressure.

The absence of a year-ago charge did help out, however.

The company's medical supply division fared worse. There, revenue inched up just 2%, and profits fell by 10%, due to business transitions and competitive pressures.

Cardinal's clinical technologies division looked even weaker.

The unit's revenue climbed just 3%, falling short of management's expectations, and its earnings plummeted 14% during the latest quarter.

Products delays and recalls caused the shortfall.

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Cardinal's pharmaceutical technologies division delivered strong results, however.

The unit posted double-digit revenue and profit growth despite softness in its sterile manufacturing business.

Meanwhile, the company's newest stand-alone division -- medical products manufacturing -- posted solid numbers as well.

The unit's sales increased by 11%, with profits growing even faster, as new orders rolled in for both existing and recently acquired product lines.

Cardinal believes that momentum will continue. The company reiterated its full-year earnings guidance of $3.50 to $3.70 a share.

Analysts are expecting company profits to come in near the high end of that range.

Words of Caution

Still, Thomas Weisel Partners analyst Steven Halper felt cautious ahead of Cardinal's latest report.

He predicted that Cardinal would beat revenue targets for the first quarter but fall short of profit estimates in the end.

Halper worried about margins for the company's big drug supply division, in particular, despite favorable industry trends.

"We do not believe that investors have fully realized that industry prescription growth has been in the 5% to 7% range lately, compared to previous levels of 3% to 4%," Halper wrote earlier this week. "Still, we are not certain that margins have stabilized -- especially given management's comments at its analyst day last month that indicated sell-side margins were still under pressure."

Halper looked for "somewhat better" performances from a couple of smaller divisions, particularly those focused on technology, but remained concerned about the company as a whole.

"Although we recognize the progress new management has made in the last year, considerable challenges remain in most business units," Halper writes. "In our view, CAH's F1Q07 results should demonstrate that management has considerable work ahead."

Halper has a peer-perform rating and a $60 price target on Cardinal's stock. His firm seeks to do business with the companies it covers.

Baird analyst Eric Coldwell felt decidedly more upbeat about Cardinal's recent performance, however.

He predicted that the company would meet Wall Street expectations for the first quarter, posting 20% EPS growth for the first time in at least two years.

Coldwell figured that strong revenue growth from the company's drug supply division would offset any margin pressure.

Coldwell acknowledged that Cardinal had created plenty of problems for itself in the past.

Specifically, he said that the company had overextended itself in an attempt to diversify during an "overwhelming downturn" in the drug distribution business.

He noted that corporate governance had slipped -- and multiple investigations had erupted -- as a result.

Still, he suggested that Cardinal has finally found solid footing on its long road to recovery.

Indeed, "Cardinal is in its best shape ever," Coldwell insisted last week. "After years of mismanagement, under-investment and unchecked

mergers and acquisitions, the significantly upgraded management is making tremendous strides consolidating systems and operations, integrating under a unified brand and disposing of tens of underperforming assets. ... While headline risk for wholesalers has increased related to pharmaceutical supply-chain dynamics, we remain bullish on sector and company-specific fundamentals and continue to view CAH as a core health care holding."

Coldwell has an outperform rating and an $82 price target on Cardinal's stock.

His firm hopes to secure investment banking business from the company over the next three months.