A Healthcare Stock Set For a Turnaround
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 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 , 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.