Cardinal Health Q3 Earnings: Undervalued On Strong Guidance

seekingalpha05-03

Cardinal Health reported Q3 earnings that beat EPS consensus and increased their FY24 guidance, particularly in the pharmaceutical segment.The loss of the OptumRx contract is seen as a short-term blip...

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overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nCardinal Health Q3 Earnings: Undervalued On Strong Guidance\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-05-03 17:20 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4688969-cardinal-health-q3-earnings-undervalued-on-strong-guidance><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Cardinal Health reported Q3 earnings that beat EPS consensus and increased their FY24 guidance, particularly in the pharmaceutical segment.The loss of the OptumRx contract is seen as a short-term blip...</p>\n\n<a href=\"https://seekingalpha.com/article/4688969-cardinal-health-q3-earnings-undervalued-on-strong-guidance\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"CAH","symbol_name":"卡地纳健康","start_time":0,"source_url":"https://seekingalpha.com/article/4688969-cardinal-health-q3-earnings-undervalued-on-strong-guidance","article_id":"2432792539","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1349026574/image_1349026574.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2432792539","pubTimestamp":1714728032,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Cardinal Health reported Q3 earnings that beat EPS consensus and increased their FY24 guidance, particularly in the pharmaceutical segment.The loss of the OptumRx contract is seen as a short-term blip","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":["earning"],"viewcount":null,"language":"en","relate_stocks":{"CAH":"卡地纳健康"},"translate_title":"Cardinal Health第三季度收益：因强劲指引而被低估","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"CAH":1},"content_text":"Cardinal Health reported Q3 earnings that beat EPS consensus and increased their FY24 guidance, particularly in the pharmaceutical segment.The loss of the OptumRx contract is seen as a short-term blip with minimal long-term impact on the investment thesis.The specialty business of Cardinal Health shows potential for growth even beyond current guidance.DCF analysis suggests a price target of $128.   Luis Alvarez I am updating my previous analysis on Cardinal Health (NYSE:CAH) in light of Q3 2024 earnings, which were released pre-market on Thursday, May 2nd. I had previously rated Cardinal Health a buy for the following reasons:  The business was successfully growing on multiple fronts with plenty of room to go  Cost mitigation was leading to higher margins and management was aggressively working to offset inflation DCF analysis suggested $115 price target at the mid-point of management guidance  Since then, Cardinal Health has returned 4.5% while the S&P 500 has grown almost 7%. The price had been higher through mid-April when Cardinal Health announced a major contract with OptumRx was ending.   CAH Price Trend (Seeking Alpha) Earnings were very impressive despite the revenue miss and showed a business that is firing on all cylinders. FY25 guidance was especially impressive given the OptumRx contract. With strong guidance supported by market trends, a well-positioned specialty business, and OptumRx being no more than a one-year blip, DCF analysis easily supports a price target of $128, which is a 24% upside from today. With that in mind, I maintain my buy rating. Q3 Earnings Recap Cardinal Health reported EPS of $2.08 beating consensus by $0.13 and revenue of $54.9 billion missing consensus by $1.21 billion. This EPS performance was ahead of guidance, but I was still very interested to see that Cardinal Health materially increased their FY24 guidance after concerns around medical devices in previous quarters and the upcoming ramp down for Optum Rx.   FY24 Guidance (CAH Investor Relations) The improved guidance was largely driven by the pharmaceutical segment, where guidance was raised and narrowed from the prior quarter.   FY24 Segment Guidance (CAH Investor Relations) We also got our first look at FY25 earnings expectations which include the impact of losing the OptumRx contract and will be critical for the valuation update below.   FY25 Guidance (CAH Investor Relations) Overall I was impressed by earnings. Not many specific items jumped out at me, the performance was really solid across the entire business. One item of note that will be critical going forward is that cost mitigation efforts drove a 200+ basis point improvement and profitability versus prior year in medical devices.   Medical Devices Segment (CAH Investor Relations) OptumRx Loss Is A Short-Term Blip On April 22nd, Cardinal Health announced that its contract with OptumRx would not be renewed. While disappointing, I do not see this as a long-term impact on the investment thesis. According to a recent article from Reuters, the EPS impact in 2025 from the loss of the deal was expected to be 45-50 cents. And it may indeed have been 45 to 50 cents, however management guidance increases EPS from FY24 into FY25 In addition, they have lowered the revenue CAGR for pharmaceuticals but are still expecting 4-6% growth in line with the industry. A couple of key items from the earnings call:  No impact from Optum is expected beyond fiscal 25 The profitability impact from Optum is $80 million net of offsetting opportunities suggesting this was a lower margin contract given the estimated $16 billion of revenue The cash flow impact is primarily from working capital treatment and days of week, not from the contract itself Specialty is expected to be a major part of the rebound  Looking through guidance, especially at the segment level, shows a slight decline in the growth trajectory but a very achievable plan without Optum. Despite all of the noise and share price impact, I don't believe this is more than a one-year blip. Specialty Business Has Great Potential Digging into the business, I feel the specialty business has significant potential even beyond what has been committed. On March 18th, 2024, Cardinal Health completed the acquisition of Specialty Networks and its analytics platform, serving more than 11,000 providers. This business on top of the existing specialty business stand to quickly accelerate growth. And the market opportunity is there. As mentioned above, revised guidance after the loss of Optum Health has the segment growing 4-6%. The core pharmaceutical market alone is expected to grow nearly 6% driving enough organic growth to support the CAGR. Specialty pharmaceuticals, however, are forecasted to grow at a CAGR of more than 36% and the recent acquisition give Cardinal scale to grow faster and more efficiently than competitors.   Specialty Pharmaceutical Growth (Market.US) Valuation I updated my ongoing DCF analysis using the following assumptions:  CAH delivers at the mid-point of management guidance, reasonable as CAH has raised guidance three times this year No margin expansion near-term, revenue growth matches cost growth 10% discount rate as a large cap, high cash flow 3% long-run growth rate based on 6% market CAGR hedged down due to scale  This DCF analysis yields a price target of $128 or 24% upside.   CAH DCF (Data: SA; Analysis: Mike Dion) Wall Street is also bullish, with a price target of $112. My $128 price target is within their range.   Wall Street Rating (Seeking Alpha) The quant rating is even flashing a strong buy with very favorable valuation multiples and profitability along with solid growth and momentum.   CAH Quant Rating (Seeking Alpha) Downside Risk The biggest downside risk is the loss of additional major accounts similar to OptumRx. All healthcare providers are under margin pressure coming out of COVID and payer negotiations are becoming drawn out and more contentious. Cardinal was well set up to absorb Optum, but they may have a lesser ability to absorb future shocks. The second largest downside risk is continued inflation challenges pressuring margin. For this reason I assumed no margin expansion in my DCF, but margin contraction could easily become reality. Fortunately management has delivered margin expansion through aggressive cost management so this is largely mitigated, but still something to be aware of. Verdict Cardinal Health posted impressive earnings and FY25 guidance that exceeded my expectations and previous DCF analysis despite the loss of OptumRx. I feel management has given a compelling case, supported by market dynamics, that the OptumRx loss is no more than a one-year blip. In addition, I feel that the specialty business could potentially deliver even more than has been included in guidance based on market research.  While there are risks from ongoing challenges with payer negotiations and inflation, management has made great strides in mitigating them throughout the last year. With favorable tailwinds, a business firing on a cylinders, and multiple valuation methods suggesting upside, I maintain my buy rating at a price target of $128.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2432792539"}