Cardinal Health Inc. CAH is well positioned for growth due to its acquisition-driven strategy, a diversified product portfolio and a robust pharmaceuticals segment. However, the margin decline remains an issue.
Shares of this No. 3 Zacks company (Hold) are up 4.5% over the past six months, compared to industry growth of 2.4%. The S&P 500 Index has remained flat over the same period.
With a market capitalization of $17.99 billion, CAH is a nationwide drug distributor and service provider to pharmacies, healthcare providers and manufacturers. It expects earnings to improve by 11.6% over the next five years. The company has an earnings yield of 7.8% compared to the industry’s 5%.
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What drives performance?
Cardinal Health’s medical and pharmaceutical offerings give it a competitive advantage in its niche business. It offers industry expertise through a growing portfolio of secure products.
In order to gain a foothold in the market and increase profits, CAH is pursuing an acquisition-oriented strategy and continues to invest in key growth companies.
The Company’s Pharmaceutical segment is the second largest pharmaceutical distributor in the United States. This segment’s products and services include drug distribution, manufacturer and specialty solutions, and nuclear and pharmacy offerings. Cardinal Health is expected to benefit from this segment going forward.
In the second quarter of fiscal 2023, pharmaceutical revenue was $47.7 billion, up 15% year over year. Performance indicates growth in sales of branded pharmaceuticals to Pharmaceutical Distribution and Specialty Solutions customers.
Cardinal Health raised its earnings expectations when it announced its second-quarter 2023 results. The company now expects adjusted earnings per share (EPS) of between $5.20 and $5.50, down from the previous guidance of $5.05 to $5.40.
Notable Developments
In March, Cardinal Health partnered with Signify Health to offer clinical services and medication management at home. The collaboration will initially focus on interventions recommended for Medicare Advantage members of mutual clients and may expand to additional services (e.g., public 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 an intelligent platform for sending prescriptions directly to patients via a secure mobile app – ScalaMed. The acquisition will likely improve digital connectivity, leading to higher patient satisfaction and better medication compliance. It has the potential to bring more patients into the system, thereby increasing Cardinal Health’s revenue.
The company acquired the purchasing organization unit of Bendcare Group (CPO-GPO) in the same month to strengthen its specialty solutions business. The acquisition is expected to expand Cardinal Health’s distribution capabilities and offering of technology solutions for specialty practices.
In June, Cardinal Health partnered with Zipline and began shipping long-range drones in North Carolina. The latest partnership between the two companies aims to transform patient experience while improving care. It aims to mitigate the risk of stockpiling and lower the barriers for patients to access necessary products, especially in hard-to-reach areas.
That same month, CAH expanded its warehouse base by adding a new distribution center in Columbus, OH to support its home solutions business. This move is likely to have strengthened the company’s pharmaceutical distribution capabilities, one of the services in the pharmaceutical business.
What is weighing on the stock?
In the second quarter of fiscal 2023, gross margin shrank 30 basis points year over year, indicating rising costs. Inflationary pressures are likely to persist in the coming quarters.
Medical segment revenue declined 7% to $3.8 billion due to the sale of the Cordis business. The company continued to face inflationary impacts and global supply chain constraints related to products and distribution. These macroeconomic headwinds are likely to continue for the remainder of the fiscal year.
Estimates trend
For fiscal 2023, the Zacks Consensus estimate for revenue is set at $201.83 billion, an 11.3% improvement from the figure reported last year.
The same is true for adjusted earnings per share of $5.42, up 7.1% from the number reported last year.
Cardinal Health, Inc. Award
Cardinal Health, Inc. Award | Quote from Cardinal Health, Inc
Stocks to consider
Some better-ranked stocks in the broader medical space are Becton, Dickinson and Company BDX, Henry Schein HSIC and The Cooper Companies COO.
Becton, Dickinson and Company, which currently holds a Zacks Rank #2 (Buy), has an estimated long-term growth of 7.8%. Its earnings have beaten estimates in each of the last four quarters, with an average surprise of 6.47%.
You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks can be found here.
BDX shares are down 9.9% over the past six months while the industry has grown 0.7%.
Henry Schein, who currently holds a Zacks rank #2, has an estimated long-term growth of 8.1%. Its gains beat estimates in three of the last four quarters and equaled it once, with an average surprise of 2.97%.
HSIC shares are up 7.8% over the past six months, compared to industry growth of 0.8%.
The Cooper Companies, which currently holds a #2 Zacks rank, has an estimated long-term growth of 11%. Its earnings missed estimates in three of the last four quarters and beat them once, with an average downside surprise of 1.82%.
COO’s shares are up 11.3% compared to the industry’s 0.8% growth over the past six months.
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