Cardinal Health ( CAH) has taken another step on its long road to recovery. The giant drug distributor generated first-quarter revenue of $19.4 billion that, while short of the $19.6 consensus estimate, came in 9% higher than a year ago. The company also grew operating profits by 3% to $372 million and -- excluding the usual slew of "special" items -- posted first-quarter earnings of 75 cents a share that beat Wall Street expectations by 3 cents. For its part, Cardinal said that its latest results "reflect strong customer demand for the company's products and services and solid earnings that were enhanced by ongoing programs to strengthen its operations." The company celebrated the first-quarter performance turned in by most of its divisions. Its giant pharmaceutical distribution business increased revenue by 9% -- and profits by a much stronger 25% -- with help from early launches of generic products, ongoing expense controls and effective inventory management. Going forward, however, the company expects this division's growth to slow down along with the overall market. Meanwhile, Cardinal's clinical technologies division, which sells its popular Pyxis medication dispensers, enjoyed a quarter of explosive growth. There, profits surged 88% on a 10% increase in revenue. But this division, like the distribution business, expects to see profit growth slow in the future. Still, Cardinal does anticipate some improvement from its underperforming pharmaceutical technologies and services division. That unit grew revenue by just 2% and saw operating profits plunge 42% during the latest quarter. The company said it was "disappointed" with that performance and promised far better results ahead. "Specific actions underway are expected to improve (the division's) operating earnings by at least 50% from the first quarter to the second quarter," Cardinal stated. And "for the full year, operating earnings are expected to grow in line with the company's long-term goal for the segment of 12% to 18% due to ongoing benefits of the actions taken and favorable comparisons to the prior year."
All told, Cardinal anticipates full-year profits of between $3.30 and $3.55 a share. Analysts expect the company to come in around the middle of that range with earnings of $3.40. Cardinal's stock barely budged on the update, falling less than 1% to $63.98 early Wednesday morning.
Even so, Ransom still likes the company' stock. "We continue to favor shares of Cardinal given modest Street expectations and scarcity value as a large-cap turnaround play," he explained. "Thus, we reiterate our outperform rating and $68 price target" on the stock.
So while we believe FY1Q results will show progress toward the various initiatives that Cardinal has communicated to the Street, do not be surprised if widely divergent interpretations arise from this reporting period and be cognizant that management's goal of reducing noise in results presentation is not likely to materialize this period." For his part, Coldwell was calling for an in-line first-quarter performance "at a minimum." Looking ahead, he also predicted that Cardinal would beat current profit expectations for both this fiscal year and next. He considers Cardinal a "core large-cap healthcare holding" because he believes the company will finally make important strides over the next several years. Others hold a similar view. They essentially see Cardinal addressing short-term challenges and then offering long-term rewards down the road. Goldman Sachs analyst Christopher McFadden is among that growing crowd. McFadden called for "modest" first-quarter results hurt by operating and environmental challenges in every single division. However, he said the situation should improve as the year wears on.
"While recent years have been humbling for Cardinal, as issues ranging from corporate governance to operating performance have undermined results and investor confidence, we expect 2006 to be a break-out year for the company," McFadden wrote last week. "We believe there is an opportunity for Cardinal to return to a premium valuation to its peers given its more diversified portfolio of faster-growing and higher-margin businesses. In addition, we believe there is an opportunity for upward earnings revisions to fiscal 2007 if the company effectively executes on its strategic initiatives." Like many of his peers, McFadden believes the stock will outperform the market going forward.