On Dec 24, we issued an updated research report on Cardinal Health, Inc. (CAH). We believe the company’s strategic buyouts, joint ventures and supply agreements should drive growth in the coming quarters. In addition, a strong financial position is a major positive for Cardinal Health.
We are impressed with Cardinal Health’s acquisition-driven strategy and continued investments in key growth businesses which have considerably boosted the company’s offerings in diversified fields apart from lending market traction. We believe the company will continue to pursue acquisitions that are strategic fits while also diversifying its revenue base over the long term.
Cardinal Health’s long-term strategic agreement with Henry Schein Inc. (HSIC) signed in Nov 2014 and the Red Oak Sourcing joint venture with CVS Health (CVS), which commenced in Jul 2014, will enhance the long-term prospects of the company. Also, the fact that Cardinal Health is relatively insulated from macroeconomic uncertainty, acts as a potent tailwind.
However, the company’s over-dependence on CVS Health for revenues is a deterrent, in our opinion. In case of a loss of a major customer, Cardinal Health faces the risk of losing considerable business which can significantly hurt its top-line. Notably, the recent loss of a pharmaceutical distribution contract with Walgreen, which accounted for 4% of the company’s fiscal 2014 revenues, has impacted the company’s revenues and earnings largely.
Also, the company derives a significant quantum of revenues through agreements with group purchasing organizations (GPOs). Loss of relationship with these organizations, who act as agents, can affect the company’s sales.
Furthermore, Cardinal Health faces stiff competition from peers in each of its business segments, which is a major headwind. The company’s pharmaceutical supply chain business faces tough competition from the likes of McKesson Corporation (MCK), Henry Schein and Owens & Minor.
Currently, Cardinal Health carries a Zacks Rank #2 (Buy).
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