Cardinal Health ( CAH) is flying high. The giant drug distributor on Thursday soared past Wall Street expectations for its second fiscal quarter, lifted by strong results in all its core businesses. Revenue climbed 13% to $21.8 billion, topping the consensus estimate by $300 million. Net income more than doubled to $739 million, with operating profits of 83 cents a share topping Wall Street targets by a nickel. "We performed well during the quarter, with solid top-line growth in each business segment, while maintaining the discipline in our operations to also deliver double-digit operating earnings growth in all four segments," Cardinal CEO Kerry Clark announced. "We feel very good about the momentum we have established through the first half of the year." Cardinal reiterated its 2007 earnings guidance of $3.25 to $3.40 a share. Wall Street is looking for profits to hit the upper end of that range. JMP Securities analyst Alexander Draper upgraded Cardinal's stock earlier this week in anticipation of strong results from the company. Draper now has an outperform rating and an $80 price target on Cardinal's shares. Shares rose 97 cents early Thursday to $71. "The last three years have been challenging for Cardinal, as the stock's 2% (compound annual growth rate) has underperformed its peers McKesson ( MCK) and AmerisourceBergen ( ABC) as well as the S&P 500," Draper acknowledged on Tuesday. But "we think the next three years could be different."
Draper goes on to note major changes at the company. Specifically, he says, the company boasts a different management team, business model and capital deployment strategy than it did a few years ago. Cardinal's leaders have strengthened the company's core drug distribution business, Draper notes, while laying out plans to shed a chronically underperforming unit. The company also continues to buy back a significant amount of its stock. As a result, Draper says, the company's profit growth should accelerate strongly going forward. To be fair, Draper acknowledges, Cardinal still faces some possible risks. Perhaps most notably, he points out, the company could lose its largest customer. That customer, drugstore chain CVS ( CVS), is planning to merge with pharmacy benefit manager Caremark ( CMX) -- which relies on rival McKesson for drug distribution services. "McKesson renewed its contract with Caremark in July 2004 with a five-year term, so the contract does not expire until July 2009," Draper notes. "The details of the CMX/CVS merger are still unfolding, and the loss of CVS as a customer in the future could occur." Still, Cardinal has plenty of fans for now. Like Draper, Baird analyst Eric Coldwell views the company as a solid investment. Indeed, he has an $84 price target on the company's stock. "We remain confident in management's ability to address near-term challenges in diversified businesses, with improving
fiscal 2007 second-half firm performance setting the stage for strong fiscal 2008 and beyond," Coldwell wrote last week. "We believe that recent health care sector jitters provide an opportunity to build positions in CAH -- which we view as a core large-cap holding for long-term portfolios." Coldwell likes the entire drug distribution sector, in fact. He recommends McKesson, which will report its own results later on today, as well. Coldwell's firm hopes to secure investment banking business from both companies over the course of the next three months.