For Cardinal Health, the Proof Will be in Its Performance

Key Points

• Cardinal Health stock is up about 1% after a mixed earnings report.  
• The stock is trying to find support after falling nearly 7% on news that its contract for OptumRx will expire in June. 
• Analysts will be weighing if the company’s growth expectations are enough to lift a stock that’s already up about 26% in the last 12 months. 

Investors are familiar with the phrase "buy the rumor, sell the news." However, Cardinal Health Inc. NYSE: CAH proved that investors can buy and sell the news. CAH stock is up slightly over 1% after posting mixed earnings on May 2, 2024. Cardinal Health missed somewhat on the top line but beat earnings estimates by 6%. Both revenue and earnings were higher on a year-over-year (YOY) basis by 8% and 19%, respectively.  

Cardinal Health is one of the premium medical stocks and one of the largest distributors of healthcare products and services. The company also manufactures medical products and some pharmaceuticals. It's not uncommon for a conglomerate like Cardinal to show strength in one category and weakness in others. However, when you dig into the report's details, you can see that the company is showing growth in all its business units. 

Will the earnings report be enough to put a floor on CAH stock, which is down more than 7% in the last month? Almost all of that loss has come in the last two weeks after the company announced its contract with UnitedHealth Group Inc. NYSE: UNH for OptumRx would expire in June. 

The Loss of Optum May Not be Optimal 

Investors are concerned that OptumRx, the company's pharmacy benefits provider, accounted for approximately 16% of its 2023 revenue. The company believes it can cover that significant gap.  

The company is maintaining its full-year and 2025 guidance based on expected high demand for its high-margin specialty drugs. Specifically, it expects a 4% to 6% compound annual growth rate (CAGR) for the segment. Cardinal also plans to lessen the impact of the Optum loss through new customer wins and "other actions." 

For the full year, Cardinal Health forecasts earnings per share in the range of $7.30 and $7.40. That's up from prior guidance of $7.20 to $7.35. The company is forecasting 26% YOY earnings growth at the low end.  

Cardinal Health is a dividend aristocrat that has increased its dividend for 27 consecutive years. The company didn't provide any dividend information. However, investors will likely receive an announcement of a dividend increase in the next week or so.  

Analyst Sentiment Will Dictate the Short-Term Trend 

The increase in CAH stock after the earnings report provides support at the level hit after the Optum news. Now, investors will have to see if analysts believe that Cardinal Health will deliver on its optimistic forecasts.  

Heading into earnings, CAH stock was up about 26% in the last 12 months and was fairly priced based on the consensus price target. However, the company's forward price-to-earnings (P/E) ratio of 14.2x and PEG ratio of 1.2 would support the idea that Cardinal Health is undervalued compared to those growth expectations.  

Analysts were relatively quiet about the OptumRx news. The Cardinal Health analyst ratings on MarketBeat showed that Wells Fargo & Company NYSE: WFC reiterated its Underweight rating on CAH stock and lowered its price target to $94 from $96.