Cardinal Health Inc. CAH is well poised for growth, given its acquisition-driven strategy, a diversified product portfolio and a robust pharmaceutical segment. However, inflationary pressure remains a concern.
Shares of this Zacks Rank #3 (Hold) company have risen 15.5% year to date compared with the industry's 12% growth. The S&P 500 Index increased 17.2% in the same time frame.
CAH, with a market capitalization of $22.26 billion, is a nationwide drug distributor and service provider to pharmacies, healthcare providers and manufacturers. The company has an earnings yield of 7.5% compared with the industry's 4.6%. It anticipates earnings to improve 14.3% over the next five years.
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What's Driving the Performance?
Strong demand across product categories, brand, specialty, consumer health and generics drove the top line for Cardinal Health’s Pharma segment in the last reported quarter. GLP-1 medications were an increasing contributor to the top line in the last couple of quarters that is likely to rise significantly going forward.
The Medical segment’s sales are being primarily driven by robust demand for at-home solutions as well as an improvement in pricing for products. Moreover, cost optimizing measures have helped the company improve margins for the segment during the last reported quarter. Cardinal Health expects to resolve the impact of inflationary pressures and global supply-chain constraint by the end of fiscal 2024, paving a path for strong recovery in margins going forward. The company’s focus on promoting Cardinal Health brand volumewith a 5-point plan is likely to boost its prospect this financial year.
Meanwhile, the return of international freight to pre-pandemic levels implies normalization of freight costs going forward, benefiting CAH’s bottom line in fiscal 2024. Moreover, strong CapEx plans for continued investments in new product development and capacity expansion, and divesture of non-healthcare portfolio buoy optimism.
In the fourth quarter of fiscal 2023, pharmaceutical revenues totaled $49.7 billion, up 15% on a year-over-year basis. The performance highlights branded pharmaceutical sales growth from existing Pharmaceutical Distribution and Specialty Solutions customers. Medical segment sales were flat at $3.8 billion.
On its fourth-quarter fiscal 2023 earnings call, Cardinal Health raised its adjusted earnings per share (EPS) guidance to $6.50-$6.75 from $6.45-$6.70.
In August, Cardinal Health launched its next-generation NTrainer System 2.0. The medical device is expected to help in reducing the neonatal intensive care unit (NICU) length of stay for premature and newborn infants.
CAH continues to expand its distribution centers. In June, the company announced its plans to build a new distribution center in Greenville, SC. The facility will support CAH’s supply of healthcare medical supplies at home, especially to those with chronic and serious health conditions. In May, the company divulged its plans to open a new distribution center in Ontario, Canada. The center will use state-of-the-art robotics technology to drive efficiencies and accuracy, which will help meet the medical and surgical product demands of Canada’s healthcare system. In April, Cardinal Health opened a new distribution center in Ohio to focus on its U.S. Medical Products and Distribution, and at-Home Solutions businesses.
During the fiscal fourth quarter, CAH launched its Navista Network — a specific suite of offering for community oncologists. Moreover, the company merges its Outcomes service with BlackRock’s transaction data system, creating opportunity for pharmacies’ growth.
What's Weighing on the Stock?
The company continues to face high costs support sales as well as rising operating expenses. Although there is an improving trend for costs and expenses, these are likely to hurt margins in fiscal 2024, especially in the first half. Meanwhile, rising interest rates is also a key area of concern amid high CapEx plans.
In the fourth quarter of fiscal 2023, gross margin remained flat year over year, implying rising costs being offset by cost saving initiatives.
The Zacks Consensus Estimate for fiscal 2024 revenues is pegged at $225.19 billion, indicating a 9.8% improvement from the previous year’s level.
The same for adjusted EPS is pinned at $6.65, indicating a 14.9% increase from the year-ago reported number. The consensus estimate for adjusted EPS has improved 1.5% in the past 30 days.
Cardinal Health, Inc. Price
Cardinal Health, Inc. price | Cardinal Health, Inc. Quote
Stocks to Consider
Some better-ranked stocks in the broader medical space are Align Technology ALGN, HealthEquity, Inc. HQY and McKesson Corporation MCK.
Align Technology, carrying a Zacks Rank #2 (Buy) at present, has an estimated long-term growth rate of 17.5%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
ALGN’s earnings surpassed estimates in two of the trailing four quarters and missed twice, delivering an average negative surprise of 1.76%. The company’s shares have risen 57.5% year to date compared with the industry’s 12% growth.
HealthEquity, carrying a Zacks Rank #2 at present, has an estimated long-term growth rate of 22%. HQY’s earnings surpassed estimates in three of the trailing four quarters and missed once, delivering an average surprise of 9.1%.
The company’s shares have rallied 10.4% year to date against the industry’s 10.6% decline.
McKesson, carrying a Zacks Rank #2 at present, has an estimated long-term growth rate of 10.7%. MCK’s earnings surpassed estimates in three of the trailing four quarters and missed once, delivering an average surprise of 8.1%.
The stock has rallied 12.2% year to date compared with the industry’s 12% growth.
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