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Cardinal Health Strong on Pharmaceutical, Competition Rife

Zacks Equity Research

On Feb 11, we issued an updated research report on Cardinal Health, Inc. CAH. While strength in the core Pharmaceutical segment is a positive, a series of acquisitions is likely to pose integration risks for the company.

The stock currently carries a Zacks Rank #3 (Hold).

What’s Favoring Cardinal Health?

Cardinal Health’s Pharmaceutical segment is the second-largest pharmaceutical distributor in the United States.

In the recently reported fiscal second quarter, Pharmaceutical revenues increased 8% to $33.74 billion on a year-over-year basis. The segment witnessed strong growth in the Specialty business and gained a large number of Pharmaceutical distribution customers.

The company is currently on track to deliver targeted annualized cost savings of $100 million in fiscal 2019 and in excess of $200 million by the end of fiscal year 2020. Management at Cardinal Health announced that benefits from this will continue to build through 2019.

Cardinal Health follows an acquisition-driven strategy and continues to focus on investment in key growth businesses to gain market traction and boost profits.

In the recent past, Clayton, Dubilier & Rice (CD&R) and Cardinal Health jointly invested in Brentwood, TN-based naviHealth. Notably, naviHealth has always been a strong performer for Cardinal Health. Management at Cardinal Health announced that the company is likely to have a competitive edge in the MedTech space with CD&R as a partner.

The company recently completed the acquisition of Medtronic's Patient Care, Deep Vein Thrombosis and Nutritional Insufficiency business for $6.1 billion, which specifically boosted the Medical segment.

Deterrents

Cardinal Health continues to acquire a large number of companies. While this improves the company’s revenue opportunities, it adds to integration risks. The Cordis acquisition was financed through a combination of debt and cash and the $1-billion debt financing increased leverage in the near term.

Additionally, the company faces tough rivalry in each of its business segments. For instance, its pharmaceutical supply chain business faces competition from bigwigs like McKesson MCK and AmerisourceBergen ABC.

Cardinal Health, Inc. Price and Consensus

 

Cardinal Health, Inc. Price and Consensus | Cardinal Health, Inc. Quote

Price Performance

Over the past year, Cardinal Health’s shares have declined 21.8% compared with the industry’s decline of 3.8%. The current level also compares unfavorably with the S&P 500’s rally of 2.2%.

Over the past 60 days, the Zacks Consensus Estimate for the company’s fiscal third-quarter earnings per share moved down 3.4% to $1.14.

Key Pick

A better-ranked stock in the broader medical space is Penumbra, Inc. PEN.

Penumbra’s long-term earnings growth rate is expected at 20%. The stock carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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