Reasons to Retain Cardinal Health (CAH) in Your Portfolio
Cardinal Health Inc. CAH is well poised for growth, given its acquisition-driven strategy, a diversified product portfolio and a robust pharmaceutical segment. However, margin contraction remains a concern.
Shares of this Zacks Rank #3 (Hold) company have gained 4.5% in the past six months compared with the industry's 2.4% growth. The S&P 500 Index has remained flat in the same time frame.
CAH, with a market capitalization of $17.99 billion, is a nationwide drug distributor and service provider to pharmacies, healthcare providers and manufacturers. It anticipates earnings to improve 11.6% over the next five years. The company has an earnings yield of 7.8% compared with the industry's 5%.
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What's Driving the Performance?
Cardinal Health's Medical and Pharmaceutical offerings provide it with a competitive edge in its niche area of operations. It offers industry expertise through an expanding portfolio of safe products.
In order to gain market traction and bolster profits, CAH pursues an acquisition-driven strategy and remains committed to investment in key growth businesses.
The company's Pharmaceutical segment is the second-largest pharmaceutical distributor in the United States. This segment's products and services include pharmaceutical distribution, manufacturer and specialty solutions, and nuclear and pharmacy offerings. Cardinal Health is expected to draw strength from this segmentin the future.
In the second quarter of fiscal 2023, pharmaceutical revenues were $47.7 billion, up 15% on a year-over-year basis. The performance suggests branded pharmaceutical sales growth from Pharmaceutical Distribution and Specialty Solutions customers.
On the fiscal second-quarter 2023 earnings call, Cardinal Health raised its earnings expectations. The company now anticipates adjusted earnings per share (EPS) between $5.20 and $5.50, up from the previous view of $5.05-$5.40.
Notable Developments
In March, Cardinal Health collaborated with Signify Health to offer in-home clinical and medication management services. The collaboration will initially focus on addressing interventions recommended for Medicare Advantage members of joint clients, and may expand into additional services (such as population health programs) and clinical interventions. The latest collaboration is expected to significantly strengthen Cardinal Health's medication therapy management services.
In July 2022, the company acquired a smart platform for transferring prescriptions directly to patients through a secure mobile app — ScalaMed. The acquisition is likely to boost its digital connectivity, leading to higher patient satisfaction and greater medication adherence. It has the potential to bring more patients to the system, thereby boosting Cardinal Health’s top line.
The company acquired the Bendcare group purchasing organization (CPO-GPO) entity in the same month to strengthen its specialty solutions business. The buyout is likely to expand Cardinal Health's distribution opportunities and technology solution offerings for specialty practices.
In June, Cardinal Health partnered with Zipline and began long-range drone deliveries in North Carolina. The latest partnership between the two companies is aimed at transforming patients’ experience while improving care delivery. It is aimed at mitigating the inventory stock-out risks and lessening the barriers for patients accessing necessary products, especially in difficult-to-reach areas.
During the same month, CAH expanded its warehouse footing by adding a new distribution center in Columbus, OH, to support its at-Home Solutions business. This move is likely to have provided a boost to the company’s pharmaceutical distribution capability, one of the services in the Pharmaceutical business.
What's Weighing on the Stock?
In the second quarter of fiscal 2023, gross margin contracted 30 basis points year over year, suggesting rising costs. The inflationary pressure is likely to continue in the next few quarters.
In the Medical segment, revenues declined 7% to $3.8 billion due to the divestiture of the Cordis business. The company continued to face inflationary impacts and global supply chain restrictions in terms of products and distribution. These macro headwinds are likely to continue for the rest of the financial year.
Estimates Trend
For fiscal 2023, the Zacks Consensus Estimate for revenues is pegged at $201.83 billion, indicating a 11.3% improvement from the previous year's reported figure.
The same for adjusted EPS is $5.42, indicating a 7.1% increase from the year-ago reported number.
Cardinal Health, Inc. Price
Cardinal Health, Inc. price | Cardinal Health, Inc. Quote
Stocks to Consider
Some better-ranked stocks from the broader medical space are Becton, Dickinson and Company BDX, Henry Schein HSIC and The Cooper Companies COO.
Becton, Dickinson and Company, carrying a Zacks Rank #2 (Buy) at present, has an estimated long-term growth of 7.8%. Its earnings surpassed estimates in each of the trailing four quarters, the average surprise being 6.47%.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
BDX’s shares have declined 9.9% against the industry’s 0.7% growth in the past six months.
Henry Schein, carrying a Zacks Rank #2 at present, has an estimated long-term growth of 8.1%. Its earnings surpassed estimates in three of the trailing four quarters and met the same once, the average surprise being 2.97%.
HSIC’s shares have gained 7.8% compared with the industry’s 0.8% growth in the past six months.
The Cooper Companies, carrying a Zacks Rank #2 at present, has an estimated long-term growth of 11%. Its earnings missed estimates in three of the trailing four quarters and beat the same once, the average negative surprise being 1.82%.
COO’s shares have gained 11.3% compared with the industry’s 0.8% growth over the past six months.
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Becton, Dickinson and Company (BDX) : Free Stock Analysis Report
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