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Reasons to Retain Cardinal Health (CAH) in Your Portfolio Now
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Cardinal Health Inc. (CAH - Free Report) 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 lost 0.1% in the year-to-date period compared with the industry’s 1.9% decline. The S&P 500 Index has gained 12.3% in the same time frame.
CAH, with a market capitalization of $24.52 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 5.7%. It anticipates earnings to improve 12% over the next five years.
Image Source: Zacks Investment Research
What's Driving CAH’s Performance?
Strength in Pharmaceutical Segment: Investors are upbeat about Cardinal Health’s Medical and Pharmaceutical offerings, which provide the company with a competitive edge in the niche space.
The segment's products and services comprise pharmaceutical distribution, manufacturer and specialty services, and nuclear and pharmacy services, which are expected to majorly drive the quarters ahead. For the past few quarters, the segment has been acting as a key catalyst when it comes to driving growth.
In the third quarter of fiscal 2024, pharmaceutical revenues amounted to $50.7 billion, up 9% on a year-over-year basis. The performance reflects branded pharmaceutical sales growth from Pharmaceutical Distribution and Specialty Solutions customers.
For fiscal 2024, management anticipates 10-12% revenue growth to represent the strong branded pharmaceutical sales growth witnessed from large customers.
Long-term Supply Agreements: Cardinal Health is also pursuing growth via joint ventures and long-term supply agreements with several firms, which have likely kept the investors interested. The company entered a long-term strategic agreement with Henry Schein, under which the latter purchased Cardinal Health’s medical supplies for physician practices. The collaboration is expected to drive core sales and prove accretive to Cardinal Health’s earnings in the long term.
The signing of a 15-year agreement with Bayer Healthcare for the contract manufacturing of Xofigo is significantly positive. In our opinion, this should help the company leverage its expertise in the nuclear pharmacy industry to expand access to a therapeutic agent and increase the use of radiopharmaceuticals in the United States and Canada.
Strong Q3 Results: Cardinal Health’s impressive third-quarter fiscal 2024 results buoy optimism. The company’s robust top-line results and solid performance in the Pharmaceutical segment were encouraging. Per management, the segmental performance was driven by brand and specialty pharmaceutical sales growth from existing customers.
In the third quarter, gross profit increased 9.1% year over year, driven by segmental growth.
Notable Developments
In April, the company announced that it has started constructing a new 350,000 square-foot logistics center in Columbus, OH. The center will serve as a centralized replenishment center for the distribution of over-the-counter consumer health products in support of its core pharmaceutical business.
What's Weighing on the Stock?
Cardinal Health faces the risk of losing considerable business in case of loss of a major customer, which, in turn, can severely impair its future revenues. In this regard, post the establishment of a generic sourcing joint venture with CVS Caremark in 2014, Cardinal Health largely depends on the former for more than 20% of its revenues.
Collectively, five of Cardinal Health’s main customers, including CVS, accounted for as much as 40% of its revenues. Meanwhile, the company’s pharmaceutical distribution contracts with OptumRx ended in June 2024. These represented 16% of total revenues in fiscal 2023. The non-renewal of the contracts is likely to adversely impact CAH’s sales in the second half of the calendar year 2024.
Cardinal Health’s Monoject syringes got unfavorable FDA recommendations in March, following reports of delay in therapy as well as inaccurate therapy (overdose or underdose) when used with a syringe pump or a patient-controlled analgesia pump. Any further regulatory setback may raise concerns.
In July, FDA issued a warning for Cardinal Health’s Presource kit plastic syringe makers, Jiangsu Shenli Medical Production Co. Ltd and Jiangsu China, who have been facing FDA investigation. Recent inspections have unveiled multiple quality system violations, leading to warning letters and import alerts. CAH has recalled the affected products to ensure patient safety and compliance with FDA regulations.
Estimate Trend
The Zacks Consensus Estimate for fiscal 2024 revenues is pegged at $225.8 billion, indicating a 10.2% improvement from the previous year’s level.
The Zacks Consensus Estimate for adjusted earnings per share (EPS) is pinned at $7.35, indicating a 26.9% increase from the year-ago reported numbers. The consensus estimate for adjusted EPS remained stable over the past 60 days.
Some better-ranked stocks in the broader medical space that have announced quarterly results are Universal Health Services (UHS - Free Report) , Boston Scientific (BSX - Free Report) and Cellectar Biosciences (CLRB - Free Report) .
UHS’ earnings surpassed estimates in each of the trailing four quarters, the average surprise being 14.58%.
Its shares have rallied 39.2% year to date compared with the industry’s 30.8% growth.
Boston Scientific, carrying a Zacks Rank #2 (Buy) at present, has an estimated long-term growth rate of 12.6%. BSX’s earnings surpassed estimates in each of the trailing four quarters, the average surprise being 7.18%.
Boston Scientific’s shares have risen 27.6% year to date compared with the industry’s 3.2% growth.
Cellectar Biosciences, carrying a Zacks Rank of 2 at present, has an estimated growth rate of 42.5% for 2024. CLRB’s earnings missed estimates in three of the trailing four quarters and beat the same once, the average negative surprise being 21.01%.
Cellectar Biosciences’ shares have lost 30.3% year to date against the industry’s 5.5% growth.
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Reasons to Retain Cardinal Health (CAH) in Your Portfolio Now
Cardinal Health Inc. (CAH - Free Report) 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 lost 0.1% in the year-to-date period compared with the industry’s 1.9% decline. The S&P 500 Index has gained 12.3% in the same time frame.
CAH, with a market capitalization of $24.52 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 5.7%. It anticipates earnings to improve 12% over the next five years.
Image Source: Zacks Investment Research
What's Driving CAH’s Performance?
Strength in Pharmaceutical Segment: Investors are upbeat about Cardinal Health’s Medical and Pharmaceutical offerings, which provide the company with a competitive edge in the niche space.
The segment's products and services comprise pharmaceutical distribution, manufacturer and specialty services, and nuclear and pharmacy services, which are expected to majorly drive the quarters ahead. For the past few quarters, the segment has been acting as a key catalyst when it comes to driving growth.
In the third quarter of fiscal 2024, pharmaceutical revenues amounted to $50.7 billion, up 9% on a year-over-year basis. The performance reflects branded pharmaceutical sales growth from Pharmaceutical Distribution and Specialty Solutions customers.
For fiscal 2024, management anticipates 10-12% revenue growth to represent the strong branded pharmaceutical sales growth witnessed from large customers.
Long-term Supply Agreements: Cardinal Health is also pursuing growth via joint ventures and long-term supply agreements with several firms, which have likely kept the investors interested. The company entered a long-term strategic agreement with Henry Schein, under which the latter purchased Cardinal Health’s medical supplies for physician practices. The collaboration is expected to drive core sales and prove accretive to Cardinal Health’s earnings in the long term.
The signing of a 15-year agreement with Bayer Healthcare for the contract manufacturing of Xofigo is significantly positive. In our opinion, this should help the company leverage its expertise in the nuclear pharmacy industry to expand access to a therapeutic agent and increase the use of radiopharmaceuticals in the United States and Canada.
Strong Q3 Results: Cardinal Health’s impressive third-quarter fiscal 2024 results buoy optimism. The company’s robust top-line results and solid performance in the Pharmaceutical segment were encouraging. Per management, the segmental performance was driven by brand and specialty pharmaceutical sales growth from existing customers.
In the third quarter, gross profit increased 9.1% year over year, driven by segmental growth.
Notable Developments
In April, the company announced that it has started constructing a new 350,000 square-foot logistics center in Columbus, OH. The center will serve as a centralized replenishment center for the distribution of over-the-counter consumer health products in support of its core pharmaceutical business.
What's Weighing on the Stock?
Cardinal Health faces the risk of losing considerable business in case of loss of a major customer, which, in turn, can severely impair its future revenues. In this regard, post the establishment of a generic sourcing joint venture with CVS Caremark in 2014, Cardinal Health largely depends on the former for more than 20% of its revenues.
Collectively, five of Cardinal Health’s main customers, including CVS, accounted for as much as 40% of its revenues. Meanwhile, the company’s pharmaceutical distribution contracts with OptumRx ended in June 2024. These represented 16% of total revenues in fiscal 2023. The non-renewal of the contracts is likely to adversely impact CAH’s sales in the second half of the calendar year 2024.
Cardinal Health’s Monoject syringes got unfavorable FDA recommendations in March, following reports of delay in therapy as well as inaccurate therapy (overdose or underdose) when used with a syringe pump or a patient-controlled analgesia pump. Any further regulatory setback may raise concerns.
In July, FDA issued a warning for Cardinal Health’s Presource kit plastic syringe makers, Jiangsu Shenli Medical Production Co. Ltd and Jiangsu China, who have been facing FDA investigation. Recent inspections have unveiled multiple quality system violations, leading to warning letters and import alerts. CAH has recalled the affected products to ensure patient safety and compliance with FDA regulations.
Estimate Trend
The Zacks Consensus Estimate for fiscal 2024 revenues is pegged at $225.8 billion, indicating a 10.2% improvement from the previous year’s level.
The Zacks Consensus Estimate for adjusted earnings per share (EPS) is pinned at $7.35, indicating a 26.9% increase from the year-ago reported numbers. The consensus estimate for adjusted EPS remained stable over the past 60 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 that have announced quarterly results are Universal Health Services (UHS - Free Report) , Boston Scientific (BSX - Free Report) and Cellectar Biosciences (CLRB - Free Report) .
Universal Health Services, sporting a Zacks Rank #1 (Strong Buy) at present, has an estimated long-term growth rate of 19%. You can see the complete list of today’s Zacks #1 Rank stocks here.
UHS’ earnings surpassed estimates in each of the trailing four quarters, the average surprise being 14.58%.
Its shares have rallied 39.2% year to date compared with the industry’s 30.8% growth.
Boston Scientific, carrying a Zacks Rank #2 (Buy) at present, has an estimated long-term growth rate of 12.6%. BSX’s earnings surpassed estimates in each of the trailing four quarters, the average surprise being 7.18%.
Boston Scientific’s shares have risen 27.6% year to date compared with the industry’s 3.2% growth.
Cellectar Biosciences, carrying a Zacks Rank of 2 at present, has an estimated growth rate of 42.5% for 2024. CLRB’s earnings missed estimates in three of the trailing four quarters and beat the same once, the average negative surprise being 21.01%.
Cellectar Biosciences’ shares have lost 30.3% year to date against the industry’s 5.5% growth.