Integration Of GI Alliance And ION Expected To Expand Key Therapeutic Offerings

Key Takeaways

• Strategic acquisitions and strong performance in key therapeutic areas and solutions are positioned to drive consistent growth and enhance revenue streams.
  
• Focus on high-margin businesses and capital deployment strategies aims to improve profit margins and enhance shareholder value.
  
• Acquisitions and financial challenges, including integration costs, trade policies, and interest expenses, may strain short-term margins and earnings despite potential operating improvements.

Catalysts

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

• The acquisition of majority stakes in GI Alliance and the integration of the Oncology network transaction are expected to enable Cardinal Health to expand across key therapeutic areas, potentially increasing revenue streams and adding value through strategic market positioning.
  
• Strong performance in Pharmaceutical and Specialty Solutions, particularly in specialty, consumer health, and generics, is expected to drive consistent growth and improve future revenue and operating earnings.
  
• Increased investment in higher-margin businesses like Nuclear, at-Home Solutions, and OptiFreight, along with initiatives like advanced therapy ordering solutions, are anticipated to boost net margins and contribute to revenue growth.
  
• The GMPD segment's ongoing improvement plan, including cost optimization and distribution network enhancements, aims to enhance profit margins despite current challenges, signaling potential future increases in earnings.
  
• Effective capital deployment strategy, including disciplined capital allocation, investment in organic growth, and share repurchases, indicates anticipated enhancement in shareholder value and EPS growth.

Cardinal Health Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cardinal Health's revenue will grow by 6.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.6% today to 0.7% in 3 years time.
• Analysts expect earnings to reach $1.9 billion (and earnings per share of $8.61) by about March 2028, up from $1.3 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $1.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.2x on those 2028 earnings, down from 24.2x today. This future PE is lower than the current PE for the US Healthcare industry at 23.9x.
• Analysts expect the number of shares outstanding to decline by 0.82% 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

• The integration and restructuring efforts associated with recent acquisitions, such as GI Alliance and ION, may not result in immediate financial benefits, potentially straining short-term net margins and earnings.
  
• Delays or complications in onboarding new customers and the costs associated with these processes could impact projected profitability improvements in the Pharmaceutical and Specialty Solutions segment, thereby affecting earnings growth.
  
• The GMPD segment faces potential financial pressure due to unforeseen impacts, such as uncollectible receivables in the WaveMark business, which could impact net margins and earnings in the near term.
  
• Potential new tariffs and trade policy challenges could lead to increased product costs and supply chain disruptions, impacting future revenue and net margins if not passed on to customers effectively.
  
• Interest rate increases and higher debt levels due to recent acquisitions may lead to increased interest expenses, affecting net income and profitability despite operating improvements in other segments.

Valuation

• The analysts have a consensus price target of $141.341 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 $156.0, and the most bearish reporting a price target of just $116.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $267.7 billion, earnings will come to $1.9 billion, and it would be trading on a PE ratio of 21.2x, assuming you use a discount rate of 6.2%.
• Given the current share price of $131.46, the analyst price target of $141.34 is 7.0% 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.