Cardinal Health (NYSE: CAH) Stock a Stifled Restart Buy

Medical and pharmaceutical products supplier Cardinal Health NYSE: CAH shares have been rangebound for years even during the February 2020 (-34%) pandemic panic sell-off on the benchmark S&P 500 index NYSEARCA: SPY. As the SPY recovers back to just 5% below all-time-highs, Cardinal Health may be setting up for a multi-year breakout as the resurgence of COVID-19 hotspots take its toll on stifling economic restarts. The surge in COVID-19 hospitalizations has caused many governors to consider rolling back the isolation mandates that were initiated globally by the end of March 2020. More and more the mandatory use of face masks is gaining momentum as even retailers like Walmart NYSE: WMT are implementing such policies for both workers and customers. Demand for protective gear as part of the new normal could drive Cardinal Health to higher multiples. Risk-tolerant long-term investors may consider monitoring this play for opportunistic entries. 

Cardinal Health Q3 FY 2020 Earnings Release

On May 11, 2020, Cardinal Health released its fiscal year Q2 2020 earnings for the quarter ending March 2020. The Company beat consensus analyst earnings estimates by $0.17 at $1.62 per share versus $1.45 per share. Revenues grew 11.2% year-over-year (YoY) to $39.16 billion versus analyst estimates of $37.04 billion. The demand surge from COVID-19 hospitalizations drove the upside momentum as the Company upped full-year 2020 EPS forecasts to $5.20 to $5.40 range from $5.00 consensus estimates. The demand-driven by COVID-19 was also offset by the cancellation of elective medical procedures thus warning of a steep drop in Q4 numbers. The Company ended the quarter with $2.3 billion in cash with access to an additional $3 billion of liquidity through AR securitization and commercial paper program.

Cardinal Health Conference Call Highlights

Cardinal Health has invested in bolstering manufacturing of additional surgical masks, procedure gowns, and face shields in the North American facilities. Demand for mask and facial protection have spiked “2 to 12 times normal levels” in the prior 90-days. The surge in pharmaceutical sales in March was driven by COVID-19 but have slowed down to below-average sales early in Q4. The restart of elective procedures is expected to improve top line. Management saw an “unprecedented increase and demand for PPE products that we both source and manufacture.” The demand outstripped supply quickly. Management stated. “We do not expect to see a similar increase in PPE-related sales in the fourth quarter despite elevated demand.” While this may have been true during the May 11, 2020, conference call, COVID-19 cases have surged nationwide just two months later into July as hotspots have warranted stifled restarts and rollbacks.

Red Zones Stifling the Restart

California Governor Gavin Newsome rolled back restarts by closing back down bars, nightclubs, movie theaters, offices and forcing most schools to start remotely. Puerto Rico rolls back openings. Illinois and Miami are considering rollbacks. On July 14, 2020, the White House Coronavirus Task Force is recommending 18 states in the “red zone” rollback re-openings due to the surge in coronavirus cases. A red zone is defined as a core-based statistical area (CBSA) where new cases surge above 100 per 100,000 population and positive COVID-19 test positivity above 10%. These states include Alabama, Arkansas, Arizona, Florida, Georgia, Idaho, Iowa, Kansas, Louisiana, Mississippi, North Carolina, Nevada, Oklahoma,  South Carolina, Tennessee, Texas and Utah.

Cardinal Health Peers Rising

Top competitors Amerisource Bergen NYSE: ABC and McKesson Corporation NYSE: MCK are leading the breakouts among the drug and medical products distributor stocks. Cardinal Health is the laggard play here and investors can use ABC and MCK as sympathy leaders. The looming threat of restart rollbacks are a boon to CAH shares as management as demand for PPE products take an unexpected surge in Q4 FY 2020.

CAH Price Trajectories

Using the rifle charts on the monthly and weekly time frames provides a broader view of the landscape for CAH stock. The monthly rifle chart is forming a double-barrel bullish pup and stochastic mini pup breakout above its monthly 5-period moving average (MA) at $49.40. The monthly upper Bollinger Bands target $59.46. The weekly rifle chart is still in a make or break with stochastic still crossed down but above the weekly market structure low (MSL) at $50.19. The crossed down stochastic is what potentially enables the opportunistic pullback entry levels at $50.62 sticky 5s zone, $49.30 monthly 5-period MA and $46.50 Fibonacci (fib) level. Note the monthly and weekly BBs have been in contraction and showing the signs of impending expansion, upper envelopes sloping up and lower envelopes slowing down. This is a sign of a multi-year breakout potential. The Company is scheduled to report Q4 results pre-market on Aug. 6, 2020.