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 11.1% in the year-to-date period against the industry’s 1.7% decline. The S&P 500 Index has gained 20.6% in the same time frame. 

CAH, with a market capitalization of $27.09 billion, is a nationwide drug distributor and service provider to pharmacies, healthcare providers and manufacturers. The company has an earnings yield of 6.8% compared with the industry’s 5.3%. It anticipates earnings to improve 9.6% over the next five years.

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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 fourth quarter of fiscal 2024, pharmaceutical revenues amounted to $55.6 billion, up 13% on a year-over-year basis. The performance reflects branded pharmaceutical sales growth from Pharmaceutical Distribution and Specialty Solutions customers.

The company expects revenues from its Pharmaceutical segment to decline 4-6% year over year in fiscal 2025. The anticipated decline reflects a $39 billion revenue headwind due to the OptumRx contract expiration in June 2024. Segmental profit is likely to increase 1-3% from the previous guidance of at least 1%.

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 into a long-term strategic agreement with Henry Schein. Under this deal, Henry Schein purchased Cardinal Health’s medical supplies for physician practices. The collaboration is expected to drive core sales and prove accretive to CAH’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 CAH 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 Q4 Results: Cardinal Health’s impressive fourth-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.

Gross profit increased 5% year over year, driven by segmental growth.

Notable Developments

Last month, CAH announced an agreement to acquire Integrated Oncology Network (“ION”) for $1.115 billion in cash. ION will enhance CAH’s oncology strategy, adding value for providers and patients. The partnership aims to equip community practices with advanced tools and technology, along with expertise from Specialty Networks’ PPS Analytics and SoNaR technology, enabling the company to deliver high-quality, patient-centered care close to home, ultimately improving patient outcomes and strengthening CAH’s leadership in healthcare.

Cardinal Health signed a distribution agreement with Australia-based Telix to become the commercial radiopharmaceutical distributor to supply finished unit doses of Telix’s PET agent, Zircaix, for the imaging of kidney cancer in the United States, subject to regulatory approval.

In August, Cardinal Health announced the opening of a new distribution center in Greenville, SC. The distribution center is dedicated to the company’s at-Home Solutions business, which is also expected to add roughly 200 jobs to the region over time. The opening of the new distribution center is likely to provide a boost to CAH’s at-Home Solutions business and generate additional revenues to support the growing market for at-home solutions.

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 17% of total revenues in fiscal 2023. The non-renewal of the contracts is likely to adversely impact CAH’s sales in fiscal 2025.

In July, the 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 the FDA regulations.

Estimate Trend

The Zacks Consensus Estimate for fiscal 2025 revenues is pegged at $215.84 billion, indicating a 4.9% decline from the previous year’s level.

The Zacks Consensus Estimate for adjusted earnings per share is pinned at $7.61, indicating a 1.1% increase from the year-ago reported numbers. The consensus estimate for adjusted EPS has improved 1 cent over the past 30 days.

Stocks to Consider

Some better-ranked stocks in the broader medical space are Universal Health Service UHS, Quest Diagnostics DGX and Baxter International BAX, each carrying a Zacks Rank #2 (Buy) at present.

Universal Health Service has an estimated long-term growth rate of 19%. UHS’ earnings surpassed estimates in each of the trailing four quarters, with the average surprise being 14.58%.

Universal Health Service has gained 17.9% compared with the industry’s 19.8% growth in the past six months.

Quest Diagnostics has an estimated long-term growth rate of 6.2%. DGX’s earnings surpassed estimates in each of the trailing four quarters, with the average surprise being 3.31%.

Quest Diagnostics’ shares have risen 14.3% in the past six months compared with the industry’s 8% growth.

Baxter’s earnings surpassed estimates in each of the trailing four quarters, delivering an average surprise of 3.74%.

BAX’s shares have lost 17.9% in the past six months against the industry’s 5.8% growth.

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