High-flying Cardinal Health hit an air pocket this month.
Shares in the diversified health services firm dropped 13% to $53.75 on particularly furious trading over Sept. 16 and 17. Cardinal broke with its longstanding policy against commenting on stock price gyrations on Sept. 17 and said that management "knows of no reasons for the decline in the price of its stock" and that it had no impending announcements.
The Dublin, Ohio-based company said it would not comment further.
Wall Street analysts who follow Cardinal are scratching their heads over the sudden stock swoon. They say that Cardinal's earnings machine continues to hum along, despite the generally tough environment for suppliers to healthcare providers. Analysts add that Cardinal is on track with the integration of several high-profile acquisitions, including the $5.4 billion purchase of Allegiance Corp., which was completed in February, and the $2.4 billion purchase of R.P. Scherer Corp., a maker of drug delivery systems, completed in August 1998.
So what gives?
"We're kind of baffled, to tell you the truth," says Andrew Speller, who follows Cardinal and its competitors for A.G. Edwards & Sons, St. Louis.
After a recent dinner for analysts that Cardinal management hosted in New York, Speller said, "I came away feeling that the strategies and fundamentals are very much intact."
That same week, Robert Walter, Cardinal's chairman and chief executive officer, briefed investors at separate healthcare conferences held by Donaldson Lufkin & Jenrette and Bear, Stearns & Co. in New York. Some Wall Street watchers speculated that investors who attended those meetings became worried about Cardinal after they heard bad news from other pharmaceutical service companies.
The final straw, according to that theory, was an earnings warning by Quintiles Transnational Corp., Research Triangle Park, N.C., which provides research services to drug companies. Quintiles, like Cardinal, was viewed as the Cadillac of its niche. But Quintiles shares dropped 42% on Sept. 16, after the company said it would fall far short of Wall Street's third-quarter profit estimates.
When Quintiles tanked, Cardinal became caught in the downdraft, the theory goes, partly because several large shareholders with stakes in both companies threw in the towel on healthcare services firms.
Larry Marsh, an analyst with Lehman Brothers in New York, attributes the weakness in Cardinal stock to a "general malaise" in healthcare services stocks. The Quintiles announcement, he says, raised fears about Cardinal stock in an already skittish market. For some, another factor may have been that Cardinal disclosed in a 10-K filing with the Securities and Exchange Commission that it had changed financial auditors.
Cardinal will not release fiscal first-quarter earnings until the end of next month. But the analyst consensus is that Cardinal will post profits of 53 cents per share for the first quarter and $2.52 per share for the fiscal year ended June 30.
Those estimates have not fluctuated despite the tumult buffeting other companies in the sector. Shares of McKesson HBOC, Cardinal's largest rival, belly-flopped this spring after serious accounting irregularities, related to the purchase of HBO & Co., led the company to slash revenues figures by $327.4 million and operating profits by $191.5 million for the past three years. Meantime, the stock price of Bergen Brunswig Corp., an Orange, Calif.-based drug distributor, collapsed after the company announced expected shortfalls in its nursing home segment.
As a group, for-profit hospital stocks have fallen by almost one-third this year, according to Joseph Chiarelli, an analyst with J.P. Morgan, New York. Stocks for distributors to healthcare providers performed even worse, he adds, shedding nearly half their value.
"People are concerned because other companies have failed to deliver on earnings expectations, and (they fear) that Cardinal will meet the same fate," Chiarelli explains. "Is this an unreasonable fear? Currently, yes, it is." Chiarelli calls Cardinal a "buy," the highest of five ratings J.P. Morgan issues.