Cardinal Health Earnings: Ends Fiscal 2023, Strong Results From GLP-1 Frenzy, Strong Generics Trend

Narrow-moat Cardinal Health CAH delivered strong fourth-quarter results and ended fiscal-year 2023 with better-than-expected numbers. Total sales during the quarter were up 13.5% year over year as solid distribution business continues to carry the company’s top line. On a favorable backdrop of healthy prescription trends, management updated fiscal 2024 guidance that it provided in June and raised sales growth expectations for its pharmaceutical segment to 10%-12% from a previous 10%. After updating our near-term assumptions as well as adjusting for the time value of money, lowered share count, and model roll, we raise our fair value estimate to $85 from $69.

Pharmaceutical sales during the quarter were up 14.7% year over year thanks to strong overall market utilization. Similar to the other two major distributors, Cardinal saw a significant tailwind from strong commercial demand for GLP-1 products (used in diabetes and obesity). Strong performance from Red Oak, Cardinal’s generic sourcing joint venture with CVS, also fueled the top line and particularly the segment’s profit, as generics provide a significantly higher margin compared with branded and specialty drugs.

Medical segment sales were down slightly and generated revenue of $15 billion in fiscal 2023, down 5.5% from last year. While there is still a lot of work to do to achieve management’s goal of returning full-year segment profit to a prepandemic level and reach $650 million by 2026—its full-year profit for 2023 was $111 million—we do see promising signs. Inflation remains relatively high but is coming down, supply chain issues have more or less been resolved, and management is optimizing its Cardinal-branded portfolio and reducing lower-margin products. Beyond the improving environment that should mitigate margin pressures, we also saw some net new customer wins in the business and an acceleration in commercial momentum, which we see as yet another indicator for healthier dynamics within the segment.