2023-03-13 11:24:09 ET
Summary
- Cardinal Health is a leader in its industry and has had another stellar quarterly performance with revenues increasing 13%.
- A part of a growing industry, the company has both a strong financial ground to stand on and plenty of industry tailwinds.
- The valuation right now seems to be very favorable and starting a position could offer plenty more upside than downside.
Investment Thesis
Cardinal Health (CAH) has a strong market position and a diversified revenue stream across its Pharmaceutical and Medical segments, which mitigates risks. The company also has a solid balance sheet and a history of generating strong free cash flow, which supports its ability to pay dividends and invest in growth opportunities.
However, investors should be aware of the risks facing the company, such as intense competition, regulatory risks, and the potential for supply chain disruptions. Additionally, the company's valuation is in line with peers, but investors should consider the potential for near-term headwinds and the cyclical nature of the industry.
Overall, Cardinal Health is a solid company with a strong market position and growth opportunities. While there are risks to consider, the company's current valuation is reasonable, and it may be a good investment opportunity for long-term investors seeking exposure to the healthcare industry.
Market Tailwinds
Cardinal Health operates in the healthcare industry, providing pharmaceutical and medical products and services to hospitals, pharmacies, and other healthcare providers. The healthcare industry is a growing market, driven by an aging population, increasing healthcare spending, and technological advancements.
Analysts have also expressed optimism about the healthcare industry's growth prospects. According to a report by GrandViewResearch , the home healthcare market is expected to grow at a rate of CAGR 7.5%, driven by increased demand and an ageing population in the US.
Market Growth (GrandViewResearch)
In a recent press release , Jason Hollar, CEO of Cardinal Health, commented on the tailwinds for the healthcare industry, stating, "We believe our industry will continue to benefit from demographic trends, ongoing innovation, and the focus on better health outcomes, while also experiencing a faster recovery from the pandemic than many other sectors."
Overall, the healthcare industry is expected to continue to grow, driven by factors such as demographic trends, technological advancements, and rising healthcare spending. With its strong position in the market and recent positive earnings report, Cardinal Health appears well-positioned to benefit from these tailwinds.
Revenue Breakdown
Cardinal Health has reported impressive second-quarter fiscal year 2023 results with revenue increasing by 13% to $51.5 billion. Despite a non-cash, pre-tax goodwill impairment of $709 million related to the Medical segment leading to a GAAP operating loss of $119 million, non-GAAP operating earnings remained strong at $467 million, in line with the second quarter of last year. Non-GAAP diluted EPS increased by 4% to $1.32 due to lower interest expense and a lower share count.
Jason Hollar, CEO of Cardinal Health, expressed confidence in the company's performance, stating "Our second quarter results demonstrate continued momentum against our plans, led by a better-than-expected performance in the Pharmaceutical segment and Medical results in-line with our prior commentary." He also mentioned the company's Medical Improvement Plan, which includes actions to mitigate supply chain inflation and drive improved performance.
Report Highlights (Earnings Report)
Investors will be pleased to hear that the company has raised its fiscal year 2023 non-GAAP EPS guidance to $5.20 to $5.50, up from $5.05 to $5.40. This positive outlook is further reinforced by the management's comments on the Pharmaceutical segment and the Medical Improvement Plan.
Revenue Summary (Earnings Report)
Overall, Cardinal Health's strong revenue growth, resilient earnings, and optimistic guidance make it an attractive investment opportunity in the healthcare industry. As Hollar stated, "We remain committed to executing against our strategies to drive long-term growth and value creation for our shareholders."
Products
The company's product line includes a wide range of offerings, including generic and branded pharmaceuticals, medical-surgical products, laboratory products, and hospital equipment.
In the pharmaceutical segment, Cardinal Health competes with other distributors such as McKesson (MCK) and AmerisourceBergen (ABC). However, Cardinal Health differentiates itself by providing an integrated suite of services to its customers, including inventory management, logistics, and consulting services. This has allowed Cardinal Health to build strong relationships with its customers, who rely on the company's expertise and support to efficiently manage its supply chains.
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Generic and branded drugs: Cardinal Health distributes a range of generic and branded pharmaceuticals, including prescription drugs, over-the-counter medications, and specialty products.
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Oncology products: The company offers a broad range of oncology drugs that are used to treat cancer patients, including chemotherapy drugs, targeted therapies, and supportive care products.
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Vaccines: Cardinal Health provides vaccines for a variety of infectious diseases, including influenza, HPV, and hepatitis.
In the medical products segment, Cardinal Health competes with manufacturers and distributors such as Medline Industries and Owens & Minor (OMI). Cardinal Health's product offerings in this segment include products such as gloves, gowns, and surgical instruments. The company has been able to maintain its market position in this segment by offering a broad range of products and focusing on quality and innovation.
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Surgical and medical supplies: Cardinal Health supplies a wide range of surgical and medical products, including gloves, gowns, masks, drapes, and sutures.
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Diagnostic imaging products: The company provides diagnostic imaging equipment, such as ultrasound machines, MRI machines, and X-ray machines, as well as contrast agents and other diagnostic imaging products.
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Medical devices: Cardinal Health offers a variety of medical devices, including respiratory and anesthesia equipment, patient monitoring systems, and surgical instruments.
Overall, Cardinal Health is a diversified healthcare company that provides a broad range of products and services to customers in the pharmaceutical and medical products segments. This diversified business model is what I think has managed to get them the edge over other companies and maneuver more efficiently in the healthcare market as a whole.
Risks
As with any investment, it is important to consider the risks associated with the company. One potential risk facing Cardinal Health is the highly competitive nature of the healthcare industry. Competitors may offer similar products or services at a lower price, which could lead to decreased market share and lower revenues.
Another risk for Cardinal Health is the potential for changes in healthcare policies and regulations. Changes in regulations could impact the company's operations and profitability, and any disruptions could have a negative impact on the business.
Additionally, the company is exposed to fluctuations in commodity prices, which could impact its costs and margins. Basic goods which the company needs to have to produce its product could see price swings depending on supply and demand. A reality that all companies in the sector works with.
Assets (Earnings Report)
Investors should also be aware of the company's debt load, which stood at $6.2 billion as of December 31, 2022. High levels of debt could impact the company's ability to invest in growth opportunities and make it more vulnerable to economic downturns.
As with any investment, it is important for investors to conduct their own due diligence and assess the risks associated with the company before making an investment decision.
Valuation and Conclusion
Cardinal Health's current valuation appears to be reasonable when compared to its peers in the industry. Its current price-to-earnings ratio (P/E) of 14.1 is lower than the industry average of 16.5, indicating that the stock may be undervalued. Additionally, its forward P/E of 13.3 is lower than the S&P 500 average of 19.1, suggesting that the company's future earnings growth is not fully priced in.
In terms of its peers, Cardinal Health's P/E ratio is lower than AmerisourceBergen's and McKesson Corporation's, both of which have a forward P/E ratio of around 12-13.
Analysts seem to be bullish on the company, with a consensus price target of around $86, an upside potential of about 17% from today's prices. Additionally, several analysts have recently upgraded their ratings on the stock, citing strong fundamentals and growth prospects.
In conclusion, while there are risks associated with investing in Cardinal Health, such as regulatory and competitive pressures, the company's current valuation and growth prospects may make it an attractive investment opportunity. With a strong market position and a focus on expanding its services and solutions, Cardinal Health may be poised for continued success in the healthcare industry. However, as with any investment, investors should conduct their own due diligence and consider their own risk tolerance before making any investment decisions.
For further details see:
Cardinal Health Continues Meeting Expectations