EUR 850.00 For Business Accounts Only

Morningstar | Strong Quarter at Cardinal Health, Despite Weakness in Medical

Cardinal Health reported quarterly results that exceeded our expectations driven by distribution growth and notable progress in its cost savings initiatives. As consistently noted by peers, specialty revenue continues to be the key driver of growth in pharmaceutical spend and distribution. While distribution was stronger than expected and strides have been made in cost savings initiatives, there were several offsets, including 1) weaker-than-expected growth and operational execution in the medical segment, 2) negative impact from generic program performance, 3) impact from prior customer renewals, and 4) opioid litigation expense. Shares are flat intraday, which seems appropriate with the lack of transparency for fiscal 2020 and lack of clarity around generic pricing, which seems contradictory to peer comments that generic pricing have stabilized. We maintain our $55 fair value estimate and narrow moat rating.

Management raised the bottom end of full-year guidance by $0.05 to narrow the range to $5.02 to $5.17, by less than the $0.16 upside from the quarter. The company also renewed its contract with its largest customer, CVS, which accounted for 25% of fiscal 2018 revenue. Concerns about pricing and medical segment performance are potential overhangs.

For the fiscal third-quarter, revenue grew 5% year over year to $35 billion, while normalized EPS increased 14% year over year to $1.59. Pharmaceutical distribution revenue increased 6%, driven by specialty pharmaceutical volumes, which were slightly offset by headwinds in generics. Medical revenue declined 1% (same as the prior quarter).