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Here's Why You Should Retain Cardinal Health (CAH) Stock Now

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Cardinal Health Inc. (CAH - Free Report) is well-poised for growth on the back of a diversified product portfolio, acquisition-driven strategy and a robust pharmaceutical segment. However, margin contraction remains a concern.

Shares of this Zacks Rank #3 (Hold) company have gained 37.2% on a year-to-date basis against the industry's decline of 11.8%. The S&P 500 Index has fallen 17.1% in the same time frame.

The company — with a market capitalization of $19.34 billion — is a nationwide drug distributor and a provider of services to pharmacies, healthcare providers and manufacturers. It anticipates earnings to improve 4.6% over the next five years. Cardinal Health's earnings yield is 7.4% compared with the industry's 4.3%.

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What's Driving the Performance?

Cardinal Health's Medical and Pharmaceutical offerings provide it with a competitive edge in its niche area of operations. It offers industry expertise through an expanding portfolio of safe products.

The company pursues an acquisition-driven strategy and remains committed to investment in key growth businesses to gain market traction and bolster profits.

Cardinal Health's Pharmaceutical segment is the second-largest pharmaceutical distributor in the United States. The segment's products and services comprise pharmaceutical distribution, manufacturer and specialty solutions, and nuclear and pharmacy offerings. The segment's strength is expected to drive its performance in the days ahead.

In the fourth quarter of fiscal 2022, pharmaceutical revenues amounted to $43.3 billion, up 13.1% on a year-over-year basis. The performance reflects branded pharmaceutical sales growth from Pharmaceutical Distribution and Specialty Solutions customers.

On the fiscal fourth-quarter 2022 earnings call, the company stated that it has been witnessing continued commercial momentum with Navista TS.

Notable Developments

In July, Cardinal Health acquired a smart platform for transferring prescriptions directly to patients through a secure mobile app — ScalaMed. The acquisition is likely to boost Cardinal Health’s digital connectivity, consequently leading to higher patient satisfaction and greater medication adherence. This has the potential to bring more patients to the system, thereby boosting Cardinal Health’s top line going forward. The company acquired the Bendcare group purchasing organization (CPO-GPO) entity in the same month to strengthen its specialty solutions business. The buyout is likely to expand Cardinal Health's distribution opportunities and technology solution offerings for specialty practices.

In June, Cardinal Health tied up with Zipline and began long-range drone deliveries in North Carolina. The latest partnership between the two companies is aimed at transforming patients’ experience while improving care delivery. It is aimed at mitigating the inventory stock-out risks and lessening the barriers for patients accessing necessary products, especially in difficult-to-reach areas. During the same month, CAH expanded its warehouse footing by adding a new distribution center in the Columbus, OH, area to support its at-Home Solutions business. This move is likely to provide a boost to Cardinal Health’s pharmaceutical distribution capability, which is included as one of the services in the Pharmaceutical business.

What's Weighing on the Stock?

In the fourth quarter of fiscal 2022, gross profit increased 9% year over year to $1.61 billion. However, gross margin contracted 6 basis points year over year, which reflects rising costs. The inflationary pressure is likely to continue in the next few quarters. The company reported a significant decline in operating income to $36 million during the last reported quarter compared with $162 million in the year-ago quarter.

With respect to the Medical segment, revenues fell 11% to $3.8 billion due to the divestiture of the Cordis business. The company reported a loss of $16 million for the Medical segment. The company recorded a loss during the quarter, primarily due to net inflationary impacts and global supply chain restrictions in products and distribution. These macro headwinds are likely to continue for the rest of the calendar year 2022.

Estimates Trend

For fiscal 2023, the Zacks Consensus Estimate for revenues is pegged at $193.31 billion, indicating an improvement of 6.7% from the previous year's reported number.

The same for adjusted earnings per share stands at $5.27, suggesting a rise of 4.2% from the year-ago reported figure.

Stocks to Consider

Some better-ranked stocks in the broader medical space are AMN Healthcare Services, Inc. (AMN - Free Report) , ShockWave Medical, Inc. (SWAV - Free Report) and McKesson Corporation (MCK - Free Report) .

AMN Healthcare, sporting a Zacks Rank #1 (Strong Buy) at present, has an estimated long-term growth rate of 3.2%. AMN’s earnings surpassed the Zacks Consensus Estimate in all the trailing four quarters, the average beat being 15.7%.

You can see the complete list of today’s Zacks #1 Rank stocks here.

AMN Healthcare has gained 4.4% compared with the industry’s 15.9% fall so far this year.

ShockWave Medical, sporting a Zacks Rank #1 at present, has an estimated growth rate of 33.1% for 2023. SWAV’s earnings surpassed estimates in all the trailing four quarters, the average beat being 180.1%.

ShockWave Medical has surged 73.6% against the industry’s 12.6% fall so far this year.

McKesson, carrying a Zacks Rank #2 (Buy) at present, has an estimated long-term growth rate of 9.9%. MCK’s earnings surpassed estimates in three of the trailing four quarters and missed the same in one, the average beat being 13%.

McKesson has gained 33.8% against the industry’s 5% fall so far this year.

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