Morningstar | Strong Volumes at Cardinal More Than Offset Weaker Pricing; Full-Year Guidance Raised
Cardinal Health reported quarterly results that exceeded our expectations, driven by strong volume growth in existing pharmacy distribution clients, but we don't expect any major changes to our fair value estimate based on the outperformance. While volumes were strong, weaker pricing offset volume strength to some extent. Still, strong revenue carried the day and drove earnings upside relative to our expectations. Following the strong results, management raised full-year guidance. Shares were up roughly 7% on Feb. 7, which seems appropriate given the stronger-than-expected results. Results reinforce our belief that scale matters in healthcare distribution and we maintain our wide moat rating.Revenue is expected to grow in the midsingle digits for the full fiscal year. Despite the strong upside in the quarterly results, guidance was increased only to $4.97-$5.17 from prior guidance of $4.90-$5.15. We would have preferred management raise guidance by more, but believe a conservative outlook is prudent and leaves a path to continued upside throughout the year. Management indicated good traction in cost-saving initiatives and expects to exceed annualized savings of $100 million in fiscal 2019 and $200 million in fiscal 2020. From a headwind standpoint, potential changes in rebate regulations and pending New York opioid assessment (appeals) ruling are potential overhangs.
For the fiscal second quarter, revenue grew 7% year over year to $37.7 billion, while normalized earnings per share declined 15% year over year to $1.29. Pharmaceutical distribution revenue increased 8%, driven by improvements in brand volume and better-than-expected growth in specialty pharmaceuticals, which were slightly offset by continued headwinds in generics. Medical revenue declined 1%, largely due to the divestiture of the China distribution and naviHealth businesses. Also, the operating margin declined to 1.3%, from 2.1% last year based on negative pricing dynamics.
Cardinal Health is a healthcare services and products company providing customized solutions for hospitals, healthcare systems, pharmacies, ambulatory surgery centers, clinical laboratories and physician offices. The company's segments include: Pharmaceutical and Medical. The company's Pharmaceutical segment distributes branded and generic pharmaceutical, specialty pharmaceutical and over-the-counter healthcare and consumer products in the United States. The company's Medical segment manufactures, sources and distributes Cardinal Health branded medical, surgical and laboratory products, which are sold in the United States, Canada, Europe, Asia and other markets.
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