Pharma Demand And Critical M&A Drive Future Growth Amid Operational Optimisation

Key Takeaways

• Operational optimizations and strong pharmaceutical demand are expected to drive significant revenue and profit growth for Cardinal Health.
  
• Strategic M&A and efficiency improvements aim to enhance margins and support long-term growth in high-demand segments.
  
• Challenges in managing costs, contracts, and raw material shortages pose risks to revenue growth, market positioning, and profitability for Cardinal Health.

Catalysts

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

• Cardinal Health is optimizing its operations after a large customer transition, which led to a 16% growth in segment profit for their Pharma and Specialty Solutions segment. This realignment is expected to enhance efficiencies and support future revenue growth.
  
• The company is experiencing strong pharmaceutical demand across various product categories, including specialty, brand, generics, and consumer health, which is expected to drive significant revenue growth, particularly with over $10 billion of incremental revenue anticipated from new customers in pharma.
  
• Cardinal Health's continued execution of its GMPD improvement plan focuses on enhancing supply chain resiliency and operational efficiency, which is likely to improve net margins over the next two years as these initiatives take hold.
  
• Initiatives in the Nuclear, at-Home, and OptiFreight segments continue to benefit from strong demand and positive industry trends, with underlying performance improvements expected to contribute to operating earnings growth.
  
• Cardinal Health is actively engaged in M&A to support its growth strategies, like the acquisition of Integrated Oncology Network, which is expected to bolster its offerings in higher-margin specialty areas, thereby potentially improving earnings and net margins in the future.

Cardinal Health Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cardinal Health's revenue will grow by 5.0% 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 $1.7 billion (and earnings per share of $8.15) by about November 2027, up from $1.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.9 billion in earnings, and the most bearish expecting $1.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.0x on those 2027 earnings, down from 23.7x today. This future PE is lower than the current PE for the US Healthcare industry at 24.8x.
• Analysts expect the number of shares outstanding to decline by 4.28% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

Cardinal Health Future Earnings Per Share Growth

Risks

• The Global Medical Products and Distribution (GMPD) segment faced unanticipated health and welfare costs, which negatively impacted its profit. Ongoing health cost fluctuations can affect net margins and earnings if these are not managed or mitigated effectively.
  
• Increased manufacturing costs and startup costs related to expanding domestic manufacturing are expected to continue impacting the GMPD segment, potentially weighing on net margins and earnings if these costs do not translate into proportional revenue growth.
  
• The expected revenue decline in the Pharmaceutical and Specialty Solutions segment due to transitions with a major customer could affect revenue negatively, even though overall customer growth is being targeted.
  
• The impact of losing lower-margin VA government distribution contracts within the GMPD segment indicates potential revenue and market share challenges, reflecting risks to revenue growth and market positioning.
  
• Industry-wide raw material shortages, specifically of moly-99, are expected to affect Nuclear and Precision Health Solutions, leading to potential temporary revenue and profit disruptions. This demonstrates a risk to the revenue stream that could disrupt earnings if the shortage persists or recurs.

Valuation

• The analysts have a consensus price target of $123.88 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 $145.0, and the most bearish reporting a price target of just $101.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $259.9 billion, earnings will come to $1.7 billion, and it would be trading on a PE ratio of 18.0x, assuming you use a discount rate of 5.9%.
  
• Given the current share price of $125.33, the analyst's price target of $123.88 is 1.2% lower. 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.