Moody's Investors Service - the credit rating agency of
) -has upgraded its outlook on
Cardinal Health, Inc.'s
) and its subsidiary, Allegiance Corporation's to stable from
negative. At the same time, it has affirmed the company's
existing Baa2 long-term and Prime-2 short-term ratings as well as
the subsidiary's existing Baa2 long-term ratings.
Earlier last month, Fitch Ratings affirmed a BBB+ rating on
Cardinal Health's long-term debt based on the similar factors
considered by Moody's. Fitch reiterated a stable outlook for
Moody's expects Cardinal Health to generate sufficient internal
cash to fund operations and growth initiatives, execute
shareholder payouts and carry out targeted mergers and
Cardinal Health has a large revenue base and Moody's expects its
liquidity to remain strong over the ratings horizon. Moody's
expects moderate leverage at the company as its Debt/EBITDA is
currently below 1.5 times, which, if sustained, could further
support an upgrade.
According to Moody's, Cardinal Health's profit margins in its
core drug distribution segment have improved owing to increased
generic drug sales and price increases. The expiration of its
lower margin business contract with
) in Mar 2013 is expected to support margins further, according
to the rating agency. The agency also noted that Cardinal Health
experienced margin expansion in its medical segment, assisted by
the AssuraMed acquisition in 2013 as well as stronger sales of
its self-manufactured products.
Moody's also believes that the 10-year generic drug joint venture
that Cardinal Health announced with
CVS Caremark Corp.
) in Dec 2013 is expected to reduce the former's generic drug
costs as it will benefit from greater scale of operations.
Cardinal Health also disclosed that it has extended its
distribution contract with CVS through 2019. Moody's expects that
the collaboration will help offset lower pricing that was
negotiated as part of the 3-year extension of its aforementioned
Cardinal Health has been witnessing rising earnings estimates on
the back of impressive fiscal second-quarter results and an
upgraded guidance for fiscal 2014.
Cardinal Health posted fiscal second quarter adjusted earnings
per share of 90 cents which is 3.2% lower than the year-ago level
of 93 cents. Revenues in the quarter went down about 12% to
$22,240 million. The earnings and revenues in the quarter
comfortably beat the Zacks Consensus Estimates despite being
lower than the year-ago level by 7 cents and $1458 million,
For fiscal 2014, Cardinal Health raised its forecast for adjusted
earnings per share to the range of $3.75 to $3.85 from the
earlier guidance of $3.62 to $3.72. The company's efficient
operating performance was quoted as the reason behind the
For 2014, twelve estimates were revised upward over the last 60
days, with no downward revision over the same period, lifting the
Zacks Consensus Estimate by 3.5% to $3.83 per share. The company
delivered positive earnings surprises in all of the last four
quarters with an average beat of 16.7%.
We are encouraged by Cardinal Health's consistent margin
improvement, favorable drug pricing and the addition of AssuraMed
which is beginning to yield positive results for the company's
However, the company's significant under-representation in
specialty drug distribution relative to its peers continues to be
a concern. Moreover, having lost its contract with Walgreens,
Cardinal will no longer benefit from the operating stability and
superior growth prospects generally associated with these drug
channel participants. The removal of such a large amount of drug
volume will lessen Cardinal Health's ability to leverage the
largely fixed cost structure inherent in drug distribution.
Cardinal Health currently has a Zacks Rank #2 (Buy).
CARDINAL HEALTH (CAH): Free Stock Analysis
CVS CAREMARK CP (CVS): Free Stock Analysis
MOODYS CORP (MCO): Free Stock Analysis Report
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