Is Cardinal Health Stock A Buy?

Cardinal Health Inc (NYSE:CAH) built a massive footprint through a series of mergers and acquisitions. It now sells medical products to nearly all U.S. hospitals. Despite its impressive growth, the company’s share price struggled to breakthrough, either before or after the pandemic hit.

It sold over $152.9 billion worth of products in the 2020 fiscal year, so as an investment opportunity is Cardinal Health stock a Buy?

What started as a food distribution business shifted to medical equipment and pharmaceuticals over the years. When the pandemic spread, management shifted priorities to invest in connected care and specialty business segments.

Healthcare isn’t a cheap business – everything the company sells must be approved by the Food and Drug Administration (FDA). Still, it manages to be one of the highest revenue-generating companies in the United States.

Can Cardinal Health continue generating those healthy revenues?

Cardinal Health Is A Drug & Device Giant

Cardinal Health started as Cardinal Foods in 1971. It was a food wholesaler that earned enough on its bottom line to buy Baily Drug Company, and thereafter expanded into drug distribution. That led to its 1983 public offering and a long history of mergers and acquisitions.

After selling off its food business, this vertically integrated company expanded horizontally. It bought over a dozen companies to expand its drug and device manufacturing and distribution capabilities.

Today, it offers logistics, products, technology, and business services to nearly 90 percent of all U.S. hospitals. It also provides products to labs, pharmacies, specialty offices and clinics, and home healthcare.

Its medical products include surgical gowns and gloves, patient monitoring solutions, compression, anesthesia, wound management, and more. It makes wheelchairs, walkers, crutches, and protective underwear among other items.

Cardinal is a full-service professional-grade equipment and supply manufacturer and distributor.

The company was involved in the opioid crisis through its hydrocodone manufacturing. It ran into several issues with the Drug Enforcement Agency (DEA) over its Florida operations through the late 2000s and 2010s.

Related legal expenses added to the company’s debt from acquisitions and take value away from investors.

Is Cardinal Health Stock A Buy?

Cardinal Health had a valuation of around $15 billion at the beginning of the year. That corresponded to a P/E ratio of 16x.

The company continued its quarterly cash dividend payments throughout the year when many other companies suspended shareholder payouts. It even raised its dividend from $0.481 to $0.486 per share. This gives it a 3.6 percent annual dividend yield of $1.94.

It generated $152.9 billion for the 2020 fiscal year, reporting a $4.098 billion loss, or $12.61 earnings per share (EPS). It spent $900 million on shareholder dividend payments and paid down $1.4 billion in debt.

The company also has a strategic partnership with CVS Health (CVS) called Red Oak Sourcing. It gives both companies an efficient supply chain to avoid disruption as COVID-19 and flu vaccines are rolled out. It has several projects in the pipeline that aim to deliver long-term value for those willing to hold.

Stock buybacks and dividend payments ensure investors get a return on their investment. But it’s not a growth stock and has a rocky road ahead to grow.

Does Cardinal Health Have A Monopoly?

Because it operates at such a massive scale, Cardinal Health has a virtual monopoly on its market. This leaves it susceptible to several market conditions. Its international exposure means it could lose value just in foreign exchange rates.

As different global economies recover at different rates over the next decade, it could make or lose a lot of money. There are also interest rates to consider as it carries a lot of debt on its books.

And it has commodity exposure, which experienced price fluctuations during the pandemic that will surely continue into the future. With all these market factors in the air, the company still has a positive outlook for the future.

CVS and OptumRx are its biggest customers, and it needs to keep these partnerships in place. Otherwise, it could leave a big hole in revenues that allows a competitor to steal its market position.

Then there’s the risk of being associated with in vogue “pandemic stocks” as the decade drags on. As the economy reopens, these companies could suffer while flashier investments take center stage.

Cardinal Health Faces A Who’s Who Of Competitors 

Cardinal Health operates in several highly competitive market segments. Its competitors include McKesson (MCK), Henry Schein (HSIC), and AmerisourceBergen. Each of these companies is aiming to muscle in on its market share.

And there are companies pouring into niches like surgical masks and gloves, for example. The past year prompted plenty of businesses to manufacture essential personal protective equipment (PPE).

Then there are technology companies working their way into medical equipment through connected wearables.

Each of these trends represents a challenge to Cardinal Health’s long-term growth potential. Still, it provides all the basics and plenty of consumables that are used across the board almost unanimously by healthcare professionals.

Brand trust like that simply cannot be bought.

Is Cardinal Health Stock A Buy? The Bottom Line

Cardinal Health is a long-standing supplier of medical and laboratory equipment and supplies. This put it in a position to profit during the pandemic as consumers stocked up on PPE and other medical necessities.

Still, the company has plenty of debt on its books from a string of acquisitions over the years. And its pipeline of new products need to be FDA approved, which is an expensive and time-consuming process.

It pays a healthy dividend and returns to investors and owns an impressive portfolio of patents. There’s not a lot of growth in the stock, but it’s cheap and stable.

---

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.