Red-Flag Warning Signs at Cardinal Health (CAH)

Cardinal Health is a large supplier of products and services to the health care industry, primarily as a wholesaler of pharmaceuticals. Its fundamentals have badly deteriorated and several red-flag warning signs are apparent:

- Trailing Twelve Months (TTM) % change in EPS growth has been declining since 2002 for 16 consecutive quarters AND has been negative for the last 7 quarters [from Col R on the PERT-A Worksheet];

- TTM % change in Pre-Tax Profit (PTP) growth has also been declining for 16 consecutive quarters AND has been negative for the last 8 out of 10 quarters [Col S];

- TTM % change in Sales growth, from March 2002, has sputtered downwards for 5 consecutive quarters, then upwards for the next 4 quarters, and then downwards again for the next 9. For FY 2005, TTM Sales growth declined in all four quarters to 9.5% as compared to a high of 16.0% in the March 2004 quarter [Col T];

- Quarterly year over year % change in EPS growth was negative for each of the four quarters of FY 2004 AND for the last two quarters of FY 2005. EPS growth by quarter for FY 2005 was 1.6%, 5.4%, 8.4%, and -3.4 as compared to its high of 28.8% in the September 2001 quarter [Col D];

- Quarterly year over year % change in PTP growth was also negative for the the first three quarters of FY 2004 AND for the last three quarters of FY 2005. PTP growth by quarter for FY 2005 was negative for the last three quarters: 10.3%, -0.8%, -9.2%, and -4.8) [Col G].

CAH’s problems have been widely reported: difficulty and delay in changing its business model to negotiated fee-for-service contracts; investigations by the SEC, U.S. Attorney and NYS Attorney General; restated earnings and other accounting irregularities; and restructuring as well as reduction of 4200 workers.

CAH once was a good-looking company and, for the period 1996-2000, annual sales and EPS grew by an average of 38.5% and 35.2% per year for those earlier 5 years.

Not today…and not for some time!!

armin