Cardinal Health (NYSE:CAH) Is A Great Buy For Patient Investors

Cardinal Health Pops After Q3 Earnings

I like Cardinal Health NYSE: CAH for many reasons but there are a few that stand out. The first is that Cardinal Health is a great dividend-payer in the health care field. The second is that Cardinal Health is part of what I like to call the infrastructure of health, the health care business that operates behind a deep moat. As a middleman between the pharma companies and makers of medical devices with many legal protections to protect it, its business is secure.

The problem for Cardinal and others like it is the opioid crisis. Cardinal, as a distributor of such drugs, maybe found culpable. That’s the bad news. The good news is that rulings on the matter have so far been less than worst-case scenarios that provide light at the end of a very dark tunnel. As a wise man once said, this too shall pass.

"Our first-quarter results and an improved outlook for the year demonstrate the resilience of our business model," said Mike Kaufmann, CEO of Cardinal Health. "We delivered a strong performance in both segments due to progress against our growth initiatives and disciplined expense management. As we continue to navigate the pandemic, we remain focused on optimizing our core businesses and making strategic investments that create long-term value for our shareholders, customers, communities and employees."

Cardinal Health Beats On The Top And Bottom Line

Cardinal Health reported some mixed results but there is one mitigating factor that overrides the negatives. Charges related to the opioid litigation cost the company $1 billion over the past quarter putting GAAP earnings in negative territory and $1.66 below the consensus estimates. Once you get past that the rest of the news is good.

The top-line revenue came in at $39.07 billion or up 4.6% from last year. Revenue was stronger than expected to the tune of 330 basis points and drove YOY improvements in adjusted earnings as well. On an adjusted basis, operating earnings rose 7% from last year putting adjusted EPS at $1.51 or $0.37 ahead of consensus. On a segment basis, Pharmaceuticals revenue grew by 5.0% to drive a 1% increase in profit while Medical increased by only 1.0% driving a 36% increase in profit.

Looking forward, the company is expecting results to be well ahead of the previous guidance. The company says a combination of cost-cutting efforts coupled with a reduced headwind from opioid litigation will drive wider adjusted margins. The guidance is calling for adj EPS for FY 2021 in the range of $5.65 to $5.95 versus the previous range of $5.25 to $5.65.

Cardinal Health Is A High-Yield And Deep Value

Cardinal Health has its share of problems but they are dissipating. What this means for investors is a stock trading at only 8.5X its forward earnings and paying a very-safe 3.90% yield. At face value, the company is paying only 35% of the consensus earnings and 33% guidance which gives little reason to fear a rate cute or dividend suspension. The cost of opioid litigation and its effects on GAAP earrings is a small worry but one that is mitigated by the balance sheet. The company is sitting on more than $8 per share in cash with ample free cash, good coverage, and low leverage. Based on the 24-year history of increases I would put my money on another increase early next summer.

The Technical Outlook: Moving Up Within A Range

Shares of Cardinal Health have been ranging for a long-time. The company’s health is supporting price action while the specter of opioid litigation overshadows all. Most recently, shares hit a bottom near the low end of the range and are now moving higher. Over the past week shares advance to set a two-month high and are indicated higher. The FQ1 news has price action edging higher as well so it looks like higher prices are to come. My targets for possible resistance are at $52, $54, and $58. If the $58 level is breached this stock may be in for a longer-term price reversal.