Cardinal Health (CAH, Financial), the $21.6 billion Ohio-based medical distributor, reported 6.9% revenue growth to $130 billion and a contrasting (-)9.7% drop in profits to $1.29 billion for full-year 2017 (1% margin compared to 1.2% in the prior year).
Overall expenses rose by 8% to $4.42 billion where Cardinal Health recorded higher costs in relation to its restructuring and employee severances and litigation charges.
In addition, the company provided its fiscal year 2018 guidance range for non-GAAP diluted EPS from continuing operations in a range of $4.85 to $5.10. This range is lower than its current fiscal year 2017 EPS figure of $5.40.
"While these last 12 months were clearly a dynamic period in health care and certainly presented challenges for our fiscal 2017, it was also a year in which we took important actions to strengthen our market positioning, grow our scale, add new, long-term drivers of growth and improve the overall balance of our integrated portfolio.
"In spite of the challenges of the year, our team was able to deliver growth in non-GAAP EPS."Â –Â George Barrett, chairman and CEO of Cardinal Health
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Valuations
Cardinal Health traded lower than its peers. According to GuruFocus data, the company had a trailing price-earnings (P/E) ratio of 16.9 times vs. the industry median of 20 times, a price-book (P/B) ratio of 3.2 times vs. 2.38 times and a price-sales (P/S) ratio of 0.17 times vs. 0.91 times.
The company had a trailing dividend yield of 2.66% with 43% payout ratio.
Average revenue and EPS estimates for fiscal year 2018 indicated forward multiples of 0.16 times and 13.6 times.
Total returns
Cardinal Health has returned (-)3.93% so far this year compared to the Standard & Poor's 500 index’s 11.86%.
Cardinal Health
Cardinal Health is a Fortune 500 health care services company based in Dublin, Ohio and was founded in 1971. According to filings, Cardinal Health is a health care services and products company that improves the cost effectiveness of health care.
The company helps pharmacies, hospitals and other health care providers focus on patient care while reducing costs, enhancing efficiency and improving quality. Cardinal Health also provides medical products to patients in the home.
In recent years, Cardinal Health has been acquisitive as shown in the following image.
(10-K)
In 2016, Cardinal Health generated 96% of its revenue in U.S. and the rest in other countries.
Cardinal Health has two segments: Pharmaceutical and Medical.
Pharmaceutical
The Pharmaceutical segment distributes branded and generic pharmaceutical, specialty pharmaceutical, over-the-counter health care and consumer products in the U.S.
This segment also operates nuclear pharmacies and cyclotron facilities, provides pharmacy operations, medication therapy management and patient outcomes services to hospitals and other health care providers, provides services to health care companies supporting the marketing, distribution and payment for specialty pharmaceutical products and manufactures and repackages generic pharmaceuticals and over-the-counter health care products.
This segment also imports and distributes pharmaceuticals, over-the-counter health care and consumer products as well as provides specialty pharmacy and other services in China.
In fiscal year 2017, revenue in pharmaceutical grew 6.8% to $116.5 billion or 89.6% of total Cardinal Health revenue and profit margin of 1.9% compared to 2.3% in fiscal year 2016.
Medical
The Medical segment distributes a broad range of medical, surgical and laboratory products and provides services to hospitals, ambulatory surgery centers, clinical laboratories and other health care providers in the U.S., Canada and China and to patients in the home in the U.S.
This segment also manufactures, sources and develops our own Cardinal Health brand medical and surgical products, which are sold directly or through third-party distributors in the U.S., Canada, Europe and other regions internationally.
In the fiscal year, Medical business revenue grew 8.6% to $13.5 billion (10.4% of revenue) and profit margin of 4.2% compared to 3.7%.
Sales and profits
In the past three years, Cardinal Health averaged revenue growth rate of 12.7%, profit growth rate of 4% and profit margin of 1.1%.
Cash, debt and book value
As of June, Cardinal Health had $6.88 billion in cash and equivalents and $10.4 billion debt with debt-equity ratio 1.52 times compared to 0.84 times the year prior. Overall debt rose by $4.86 billion year over year while equity increased by $257 million.
Of Cardinal Health’s $40 billion assets 23%Â were identified as blue sky elements such as goodwill and intangibles while book value rose 3.9% year over year to $6.83 billion.
Cash flow
In its unaudited 8-K filings, Cardinal Health’s cash flow from operations for fiscal year 2017 declined by (-)60% to $1.18 billion mostly brought by lower profits in the period. Capital expenditures were $387 million leaving the company with $797 million in free cash flow compared to $2.51 billion in the year prior.
Cardinal Health, nonetheless, provided 1.5 times its free cash flow in shareholder payouts (dividends and buybacks). The company also raised $4.86 billion in borrowings net repayments.
The cash flow summary
In the past three years, Cardinal Health allocated $1.15 billion in capital expenditures, raised $6.36 billion in debt net repayments, generated $5.54 billion in free cash flow and provided $3.85 billion in shareholder payouts at an average free cash flow payout ratio of 87.5%.
Conclusion
Other than the unappealing increase in restructuring costs among others that dampened Cardinal Health’s profits in the recent fiscal year, the medical distributor appeared to be churn-steady business growth despite ongoing industry tumults.
Meanwhile, the company did exhibit a more leveraged balance sheet accompanied with blue sky elements while having maintained prudent shareholder payouts in recent years.
Analysts have an average price target of $75.35 per share vs. $68.23 at the time of writing. On the other hand, average revenue estimates multiplied with the three-year P/S average and 15% margin indicated a per-share figure $98.4.
Absent headline risks that Amazon (AMZN, Financial) may enter the pharmacy distribution business, Cardinal Health is a buy with $75 target price.
Disclosure: I do not have shares in any of the companies mentioned.
