Aug 09, 2023

Reasons to Retain Cardinal Health (CAH) in Your Portfolio

Cardinal Health Inc. CAH is well poised for growth, given its acquisition-driven strategy, diversified product portfolio and robust pharmaceutical segment. However, margin contraction remains a concern.

Shares of this Zacks Rank #3 (Hold) company have gained 10.8% so far this year compared with the industry's 8.8% growth. The S&P 500 Index increased 9.4% in the same time frame.

CAH, with a market capitalization of $21.84 billion, is a nationwide drug distributor and service provider to pharmacies, healthcare providers and manufacturers. The company has an earnings yield of 6.6% compared with the industry's 4.7%. It anticipates earnings to improve 12.4% over the next five years.

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Cardinal Health's Medical and Pharmaceutical offerings provide it with a competitive edge in its niche area of operations. The company offers industry expertise through an expanding portfolio of safe and effective pharmaceuticals and medical products.

In order to gain market traction and bolster profits, CAH pursues an acquisition-driven strategy and remains committed to investing in its key growth businesses.

The company's Pharmaceutical segment is one of the leading pharmaceutical distributors in the United States. Its products and services include pharmaceutical distribution, manufacturer and specialty solutions, and nuclear and pharmacy offerings. Cardinal Health is expected to draw strength from this segment in the future.

In the third quarter of fiscal 2023, Pharmaceutical revenues totaled $46.8 billion, up 14% on a year-over-year basis. The performance suggests branded pharmaceutical sales growth from Pharmaceutical Distribution and Specialty Solutions customers.

On its fiscal third-quarter 2023 earnings call, Cardinal Health raised its earnings expectations. The company now expects adjusted earnings per share (EPS) between $5.60 and $5.80, up from the previous guidance of $5.20-$5.50.

CAH continues to expand its distribution centers in Canada. In May, the company announced its plans to open a new distribution center in Ontario, expanding its presence in nine strategic locations.

The latest facility will use state-of-the-art robotics technology to drive efficiencies and accuracy, which will help in meeting the medical and surgical product demands of the Canadian 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.

Last month, the company announced the launch of Stray Away hair management drape, which has a novel design for advanced surgical procedure preparation. The drape is expected to help minimize hair from obstructing the surgical area.

In March, CAH collaborated with Signify Health to offer in-home clinical and medication management services. The collaboration has been inked to address 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 partnership is expected to significantly strengthen Cardinal Health's medication therapy management services.

In the third quarter of fiscal 2023, gross margin contracted 20 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 5% to $3.7 billion due to the divestiture of the Cordis business. CAH continues to face inflationary impacts and global supply chain restrictions in terms of products and distribution. These macro headwinds are expected to continue for the rest of the financial year.

The Zacks Consensus Estimate for 2023 revenues is pegged at $203.97 billion, indicating a 12.5% improvement from the previous year's level.

The same for adjusted EPS stands at $5.68, indicating a 12.3% improvement from the year-ago reported number.

Cardinal Health, Inc. price | Cardinal Health, Inc. Quote

Some better-ranked stocks from the same industry are Merit Medical Systems MMSI, West Pharmaceutical Services WST and CONMED CNMD, each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Merit Medical Systems has an estimated long-term growth of 11%. The company's earnings surpassed estimates in each of the trailing four quarters, the average surprise being 20.22%.

So far this year, MMSI's shares have gained 18.9%.

West Pharmaceutical Services has an estimated long-term growth of 6.3%. Its earnings surpassed estimates in three of the trailing four quarters and missed the same once, the average beat being 13.61%.

So far this year, WST's shares have gained 47.7%.

CONMED has an estimated long-term growth of 19.4%. CNMD's earnings surpassed estimates in two of the trailing four quarters, missed once and met the same in another, the average negative surprise being 10.54%.

CONMED has gained 33.8% so far this year.

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Cardinal Health Inc. Merit Medical Systems West Pharmaceutical Services CONMED the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.