Cardinal Health Earnings: Solid Results and Margin Expansion Demonstrate Business Momentum

Narrow-moat Cardinal Health reported second-quarter results that came in slightly ahead of our expectations. Total sales of $55.3 billion were down 3.8% year on year but up roughly 16% excluding the loss of OptumRx revenue impact. Solid prescription trends across branded and generic pharmaceuticals coupled with drug inflation provided nice tailwinds to the top line. Specialty solutions, recently bolstered by acquisitions of Integrated Oncology Network (closed December) and GI Alliance (closed Jan. 30), also contributed. Profits held up well, too, as Cardinal is staying on track to deliver the best distribution segment margin it has seen over the past three years. While we attribute some of this to loss the of Optum since the customer had weighed down Cardinal’s profits with its pricing power, we also think solid cost management and greater efficiency played a part. Management raised full-year guidance on the backdrop of these positive results and the inclusion of contributions from recent acquisitions. Pharmaceutical segment profit is now expected to grow 11% at the midpoint, up from the previous 5%, and the EPS target range was raised $0.10 at the midpoint to land between $7.85 and $8.00. After adjusting our near-term view and accounting for recent cash flows, we are raising our fair value estimate to $116 per share from $107.