Analyst Note| Soo Romanoff |
Cardinal Health reported fourth-quarter normalized EPS of $1.04 based on better cost management, partially offset by revenue decline. Despite the beat, management’s outlook was relatively pessimistic compared with its two closest peers, McKesson and AmerisourceBergen, which we attribute to the company’s increasing ambulatory mix and negotiated (client) contract terms. As the industry has evolved toward specialty drugs, Cardinal Health has lagged peers in capturing share and has focused on ambulatory clients, enabled through its medical acquisitions. Shelter-in-place orders as a result of the coronavirus pandemic have affected this subsegment most, as patients have deferred or canceled elective procedures and provider visits. This was likely exacerbated with the pull-through of commodity drugs and personal protective equipment volumes in the third quarter along with incremental costs to secure these high-demand items. We expect this dynamic to continue based on the assumed slow recovery. The timing of the pandemic has also been tough on the company, as it recently recovered from a disastrous gown contamination mishap. Despite these adverse trends, we do not anticipate a notable swing in its leading position unless the company is unable to recover for an extended period. The three largest distributors have secured roughly a third of the pharmaceutical market. We will continue to monitor the market trends and maintain our narrow moat and fair value estimate of $60 per share.