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 #2 (Buy) company have risen 24.3% in the year-to-date period compared with the industry’s 4.8% gain. The S&P 500 Index has gained 27.1% in the same time frame.         

CAH, with a market capitalization of $29.83 billion, is a nationwide drug distributor and service provider to pharmacies, healthcare providers and manufacturers. The company has an earnings yield of 6.3% compared with the industry's 4.6%. It anticipates earnings to improve 10.2% 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 for growth.

In the fourth quarter of fiscal 2024, pharmaceutical revenues declined as expected due to the unfavorable impact of the customer contract expiration with OptumRx in June 2024. Although total revenues declined 4.3% on a year-over-year basis to $52.28 billion, the top line fared better than market estimates. Pharmaceutical revenues decreased 5% to $48 billion. Excluding the OptumRx impact, Pharmaceutical sales were up 16%, driven by branded and specialty pharmaceutical sales growth from existing Pharmaceutical Distribution and Specialty Solutions customers. Pharmaceutical profit totaled $530 million, up 16% from the year-ago level.

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

Recent Acquisitions to Boost Sales:Cardinal Health entered into agreements last month to acquire two companies — Advanced Diabetes Supply Group (“ADSG”) and a majority stake in GI Alliance (“GIA”).

In line with Cardinal Health's at-Home Solutions strategy to support the rapidly growing diabetic patients, ADSG provides comprehensive diabetes solutions that are customized to support individual patients at home. GI Alliance operates a multi-specialty platform that will expand across the nation and in other key therapeutic areas. This will also build upon the technology and specialty practice capabilities acquired by Cardinal Health in the previously announced acquisitions of Specialty Networks and Integrated Oncology Network. The two transactions are expected to grow Cardinal Health's revenues, segmental profit and adjusted earnings per share in the first 12 months following the closure.

Strong Q1 Results: Cardinal Health’s impressive first-quarter fiscal 2024 results buoy optimism. The company’s robust top-line results and solid performance in the Pharmaceutical segment, excluding OptumRx impact, were encouraging. Per management, the segmental performance was driven by brand and specialty pharmaceutical sales growth from existing customers.

Global Medical Products and Distribution revenues totaled $3.1 billion, up 3% year over year, driven by growth volume from existing customers. Sales from at-Home Solutions, Nuclear and Precision Health Solutions, and OptiFreight Logistics totaled $1.2 billion, up 13% year over year.

Gross profit increased 9.1% year over year, driven by segmental growth. Operating income amounted to $568 million against an operating loss of $32 million in the year-ago quarter. Adjusted operating income increased 12.2% year over year to $625 million.

Notable Developments

Last month, Cardinal Health launched the Kendall SCD SmartFlow Compression System in the United States. The system is the next generation of the Kendall Compression Series, offering an enhanced clinician and patient experience. Kendall SCD SmartFlow Compression System is designed to help prevent venous thromboembolism events, enhance blood circulation and treat pain and swelling related to venous stasis.

Cardinal Health and T2 Biosystems recently entered into a multi-year exclusive U.S. agreement in October, selecting CAH as an exclusive distributor to sell T2 Biosystems’ FDA-cleared direct-from-blood diagnostics for the rapid detection of sepsis-causing pathogens, including the T2Dx Instrument, the T2Bacteria Panel and the T2Candida Panel.

What's Weighing on the Stock?

Cardinal Health risks losing considerable business in case of a major customer loss, which can severely impair its future revenues. In this regard, since 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.

Five of Cardinal Health’s main customers, including CVS, collectively accounted for as much as 40% of its revenues. Meanwhile, the company’s pharmaceutical distribution contract with OptumRx ended in June 2024. These represented 17% of total revenues in fiscal 2023. The non-renewal of the contract reflects a $39 billion revenue headwind for 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 products to ensure patient safety and compliance with the FDA regulations.

Cardinal Health, Inc. Price

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

Estimate Trend

The Zacks Consensus Estimate for fiscal 2025 revenues is pegged at $219 billion, indicating a 3.5% decline from the previous year’s level.

The Zacks Consensus Estimate for adjusted earnings per share (EPS) is pinned at $7.82, indicating a 3.9% increase from the year-ago reported numbers. The consensus estimate for adjusted EPS has improved 1.7% over the past 30 days.

Other Stocks to Consider

Some other top-ranked stocks in the broader medical space are Masimo MASI, Accuray ARAY and AxoGen AXGN.

Masimo, sporting a Zacks Rank #1 (Strong Buy) at present, has an estimated growth rate of 11.8% for 2025. You can see the complete list of today’s Zacks #1 Rank stocks here.

MASI’s earnings surpassed estimates in each of the trailing four quarters, delivering an average surprise of 17.10%. Its shares have risen 48.6% compared with the industry’s 6.4% growth year to date.

Accuray, carrying a Zacks Rank #2 (Buy) at present, has an estimated growth rate of 1200% for 2025. Its earnings missed estimates in three of the trailing four quarters and met in one, delivering an average negative surprise of 141.97%.

ARAY’s shares have lost 25.8% against the industry’s 6.4% growth year to date.

AxoGen, carrying a Zacks Rank of 2 at present, has an estimated earnings growth rate of 252% for 2025. It delivered a trailing four-quarter average earnings surprise of 91.11%.

AXGN’s shares have soared 111.4% year to date compared with the industry’s 6.4% growth.

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