Cardinal Health Earnings: Strong Sales Thanks to GLP-1s and COVID-19 Vaccines; Guidance Raised

Narrow-moat Cardinal Health CAH reported fiscal 2024 first-quarter results that were slightly ahead of our expectations. Total sales were up 10.4% year over year thanks to strong performance from the distribution business, with slight offsets from the medical segment. Prescription utilization remains strong, and growth in specialty drugs and GLP-1 medications (diabetes and obesity drugs) continues to buoy demand. Against the backdrop of an improved outlook for the pharmaceutical segment, coupled with higher-than-expected contributions from COVID-19 products, the firm raised its full-year guidance for adjusted diluted EPS to $6.75-$7.00 from $6.50-$6.75. After updating our model and accounting for the time value of money, we are raising our fair value estimate to $90 per share from $85.

The pharmaceutical segment, which is mainly the drug distribution business, was up 11.3% during the quarter. On the generics side, market trends look to be healthy, and management has not called out any changes in pricing, which we see as a positive. On the branded side, notable winners were once again specialty drugs and GLP-1s. While the top line is enjoying a healthy boost from GLP-1s, we regard them as a double-edge sword due to their slim margins. As with other distributors we cover, Cardinal Health’s gross margin shrank sequentially despite some of its other businesses improving their margins. We expect this trend to continue throughout the year and will keep a close eye on how the firm can pull other levers to mitigate this headwind.

The medical segment was down 0.5%, but its margin profile continues on its improvement journey with stable momentum. Cooling inflation and investments that Cardinal Health has put into the business have both helped from a bottom-line perspective. While cost dynamics of certain inputs remain elevated and face volatility, we expect them to slowly normalize quarter over quarter.