What in the world is the consumer stock-picking guy who enjoys sprinkling in macro commentary doing writing about health care? What can I say? The State of the Union address sparked thoughts that have been building as earnings season gets under way. But here is a quick and dirty secret: I used to cover health care stocks. I despised picking apart the earnings releases of publicly traded hospitals and the companies that supplied them with the likes of rubber gloves and drugs. They were the worst reads ever, but I digress. Cardinal Health (CAH) is my stock of the day, so let's set it up.
Aside from the president's hour-plus speech, there were other inspirations for my call on the health-care-services company. At the core, each branch of the investment thesis comes back to my investing philosophy that there is always more to a single earnings report than the results of just one company. I always dissect earnings as if I were a mutated Inspector Gadget with four eyes -- two analyzing that particular company's financials and the other two seeking information that could lead to another investment in the same sector or a sector on the other side of the spectrum (retail and tech are good examples of pairing up industries on opposing ends). Here is a peek inside of my head this week.
- Watson Pharmaceuticals (WPI) materially hiked its annual earnings guidance owing to the flourishing generics drug market (thank you, Lipitor).
- Kimberly-Clark (KMB) had a dirty-diaper-type of quarter and outlook, but sales of its exam gloves and surgical products rose 10% and were the bright spot of the product portfolio.
Cardinal Health is the second-largest drug distributor in the industry, behind McKesson (MCK). I would rather you dance over to Cardinal Health then McKesson because the fundamental story is more encouraging, valuation is relatively comparable, and the stock has a 1% higher dividend yield. That's the hook. But just like an infomercial -- wait, there's more!
Cardinal Health is doing more business with existing customers, indicating its customer-service issues are in the past and CAH has gotten back in the good graces of key accounts (give credit to a still-fresh CEO). This new business with older clients extends to the company's higher-profit margin Medical Products division as well.
Generics' margin performance was strong in the first fiscal quarter for CAH, despite fewer product launches and deflation. Imagine the margin potential with the brand-to-generic cycle spinning quicker while Cardinal's supply chain is streamlined.
When the company last reported earnings, Wall Street got in a tizzy because management neglected to hike its earnings outlook, counter to what occurred at McKesson. But Wall Street was wrong to be so mean, and the stock's recent trading volume seems to be signaling two possible outcomes.
One, Cardinal Health has raised its annual earnings guidance in the fiscal second quarter (reporting Feb. 2) for the past two years and, given the internal and external fundamentals, it appears ready to do so again.
Two, the company is at the point where its existing share repurchase program ($450 million remaining going into the fiscal second quarter after buying back $300 million in the first quarter) is nearly completed. Due to the amount of cash on the balance sheet, a sizable new program could be in order. By enacting this buyback, Cardinal Health would strongly influence a net earnings stream that already benefits from new generic drug introductions/consumer move to generics.