Cardinal Health Earnings: Positive Results From Strong Core Business but Medical Continues To Suffer

Narrow-moat Cardinal Health CAH reported better-than-expected results third-quarter results. Total sales were up 12.6% year over year driven by strong performance from its core distribution business. We are maintaining our fair value estimate of $67 per share as minor upticks in near term assumptions did not have any material impacts.

The pharmaceutical segment remains robust and reported another strong quarter with sales up 14.3% year over year. We continue to see impressive growth across specialty distribution, with the business up double-digits during the quarter, and expect it to keep fueling the business going forward. We believe the currently strong drug utilization rate will remain stable for the remainder of the year and work nicely as a secure underlying base for Cardinal Health.

The medical segment, with sales down 5.1%, continues to suffer from inflationary pressures, lowered volumes, and difficult year-over-year comparisons due to lowered COVID-19-related equipment volume and pricing. Management noted that bringing up the segment profit to at least $650 million by 2025 is its main goal, but we remain hesitant on the probability of achieving this. Our weak conviction is exacerbated by management’s updated outlook for the segment, lowering its profit to a 50% decline from flat to a decline of 20%. Given the difficult environment, we believe there are two ways to recover the segment: mitigate cost pressures by raising prices and distribution fees and selling more Cardinal Health-branded items that post higher margins compared with other items in the segment. The first solution is already under its way, and we await it to reap full benefits, especially given general improvements in international freight, but the managing favorable product mix will be a more challenging feat, considering the commoditized nature of the items. We will continue to keep a close eye on the segment over the next few quarters to assess the company’s efforts on these fronts.