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Published: February 22, 2010
Managing a large business can prove
daunting when the many moving parts fall out of synch. Yet a
fresh set of eyes can help to chart a new course, getting all
the pieces moving in harmony. That lesson applies for investors
in Cardinal Health (NYSE: CAH). New management has begun
to revamp many aspects of the business, and the results are
already showing up on the bottom line.
Cardinal, which acts a middleman between drug companies and drug
buyers, fell out of favor with investors in recent years as
growth stalled, profits slumped and industry buying habits
changed. Shares routinely traded above $60 a few years ago, but
now fetch half as much. To reinvigorate the stock, Cardinal’s
Board of Directors decided to slim down the company’s focus by
spinning off 80% of its CareFusion (NYSE: CFN) technology
division, pay down more than $1 billion in debt, and most
importantly, bring in fresh leadership through the hiring of CEO
George Barrett last September. While the turnaround efforts
began before Barrett arrived from Teva Pharmaceuticals (Nasdaq:
TEVA), his handiwork has quickly become apparent.
Barrett’s three-pronged approach: cut costs; invest in
technology to improve interaction with customers; and rebuild
market share. Although sales may only grow at a moderate pace in
the largely mature healthcare sector, profit margins look set to
turn back up during the next few years. This should enable
management to steadily boost its dividend while maintaining
stock buybacks.
Turnarounds often take place too slowly to capture Wall
Street’s interest, especially when stocks trade in anticipation
of short-term results -- and Cardinal surely has its share of
challenges. For example, the decision to shed its CareFusion
technology division has created more than $40 million legacy
expenses that will crimp profits for the next year or two. In
addition, a decision to boost IT spending will create a far
stronger sales platform for its customers, but will entail
upfront expenses in the next few quarters.
The generic drug environment serves as a key example of the
Cardinal’s near-term challenges and long-term opportunities. In
the current fiscal year that ends June 30, Cardinal is
experiencing a big drop-off in newly-available generic drugs.
But beginning in the coming fiscal year, a large range of
branded drugs
will lose patent protection, enabling Cardinal to sharply
boost sales in this segment once again. (Branded drugs are
usually sold directly to major hospital and pharmacy chains,
while generic drugs are sold through distributors such as
Cardinal).
Cardinal's IT investment may yet prove most crucial to its
turnaround. The company believes it can simplify purchasing
decisions for customers by sharply improving its technology
platform. . The drug distribution business has often simply been
a matter of best pricing, but management believes that improved
IT can be a game-changer in terms of contract awards and
pricing.
All of these efforts are only beginning to have an impact on the
bottom line. Management has boosted fiscal 2010 profit guidance
about 20 cents to about $2.15 a share, still well below last
year’s take of $2.80 a share.
Looking ahead to fiscal 2011, though, the profit outlook should
brighten. Per share profits look set to rebound near the $2.75
mark, and would be roughly 30 cents higher than that were it not
for the ongoing expenses associated with the CareFusion
division. Fiscal 2012 should continue to look even better as
one-time expenses drop off and new generic drug launches over
the course of calendar 2011 begin to boost profits.
-- David Sterman
Contributor
StreetAuthority |
