Acquisitions And US Manufacturing Expansion Will Secure Operational Success

Key Takeaways

• Strategic acquisitions and expansion into high-margin businesses enhance Cardinal Health's revenue streams and improve long-term growth and profitability.
  
• Investments in technology, manufacturing, and cost optimization strengthen operational efficiency and support sustained revenue and earnings stability in the U.S. market.
  
• Tariff risks and macroeconomic challenges could impact Cardinal Health's margins, earnings reliability, and revenue growth, particularly in pharmaceuticals and generics.

Catalysts

Operates as a healthcare services and products company in the United States, Canada, Europe, Asia, and internationally.

• Cardinal Health's strategic acquisitions, such as GI Alliance, Integrated Oncology Network, and Advanced Diabetes Supply Group (ADSG), are expected to enhance higher-margin revenue streams and improve long-term growth, impacting earnings positively.
  
• Investment in expanded manufacturing, distribution nodes, technology, and automation in the U.S. is anticipated to strengthen operational efficiency and support sustained revenue growth.
  
• Strong performance in the Pharmaceutical and Specialty Solutions segment, alongside successful onboarding of significant customers like Publix, suggests potential for robust revenue and profit growth in future quarters.
  
• The expansion and growing contribution of high-margin businesses, such as Nuclear, at-Home Solutions, and OptiFreight, along with demand-driven initiatives, are likely to increase overall net margins and profitability.
  
• Aggressive cost optimization and operational improvements, particularly in the GMPD segment, are expected to mitigate impacts from tariffs and contribute to future earnings stability and growth.

Cardinal Health Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cardinal Health's revenue will grow by 7.3% annually over the next 3 years.
• Analysts are assuming Cardinal Health's profit margins will remain the same at 0.7% over the next 3 years.
• Analysts expect earnings to reach $2.0 billion (and earnings per share of $8.97) by about May 2028, up from $1.6 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $1.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.3x on those 2028 earnings, down from 23.3x today. This future PE is greater than the current PE for the US Healthcare industry at 19.7x.
• Analysts expect the number of shares outstanding to decline by 2.01% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Cardinal Health Future Earnings Per Share Growth

Risks

• Cardinal Health faces risks associated with tariffs that could add $200 million to $300 million of costs in fiscal 2026, potentially impacting net margins if not fully mitigated through operational actions or price adjustments.
  
• The GMPD segment turnaround is progressing, but tariffs and the broader macroeconomic environment could threaten the segment's profitability, affecting overall earnings reliability.
  
• Potential pharmaceutical tariffs could lead to an increase in costs for brand and specialty pharmaceuticals, which might not be fully passed on to pharmacies, impacting revenue and gross margins.
  
• Macroeconomic challenges, such as reduced consumer spending power, could lead to slower pharmaceutical demand growth, particularly in lower-margin generics, potentially affecting revenue growth rates.
  
• There is uncertainty surrounding future customer contracts, as prior expiration and onboarding of new clients affect revenue stability, which is crucial for maintaining revenue growth targets.

Valuation

• The analysts have a consensus price target of $154.741 for Cardinal Health based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $173.0, and the most bearish reporting a price target of just $119.12.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $274.9 billion, earnings will come to $2.0 billion, and it would be trading on a PE ratio of 20.3x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $151.69, the analyst price target of $154.74 is 2.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.