On Tuesday, Evercore ISI raised its rating on Cardinal Health (NYSE:CAH) shares from In Line to Outperform, maintaining a price target of $140.00. The company, currently trading near its 52-week high with a strong financial health score of 3.2 out of 5 according to InvestingPro, has demonstrated remarkable momentum with a 25.87% price return over the past six months.
The upgrade reflects the analysts' view that the company's fiscal year 2025 (FY25) pharmaceutical Adjusted Operating Income (AOI) guidance is conservative and suggests potential for higher long-term guidance. The current pharma AOI growth forecast of 4-6% for the remainder of FY25 contrasts sharply with the 18% growth achieved in the first quarter of FY25, excluding COVID-related impacts. The analysts see no fundamental reason for the projected decline.
The analysts also noted that the guidance does not account for the November acquisition of GIA, which is expected to contribute approximately $70 million to FY25 AOI if it closes in mid-FY25, translating to roughly 4% additional growth.
They anticipate that Cardinal Health could increase its long-term AOI growth rate from 4-6% to 5-7% at the investor day in June. Moreover, management's efforts to improve Generic Medicines Pricing Dynamics (GMPD) are showing results, with the expectation of AOI turning positive in FY24.
Despite challenges, such as industry pricing headwinds, the analysts expect these to have a limited impact. They project an upside to FY25 earnings per share (EPS), with the potential for additional growth if the core Pharma segment outperforms. The analysts have adjusted their FY25 EPS estimate slightly downward from $7.95 to $7.91, leaving room for additional upside, and increased their FY26 EPS forecast from $8.99 to $9.04. They believe that after annualizing the impact of the Optum loss, Cardinal Health's EPS growth rate could return to a 12-14% compound annual growth rate (CAGR) in FY26 and beyond.
The analysts also highlighted that Cardinal Health trades at approximately 14 times its calendar year 2025 (CY25) EPS, compared to competitor McKesson's (NYSE:MCK) 16 times CY25 EPS. They suggest that this valuation gap may narrow as Cardinal Health continues to execute and grow at a comparable EPS CAGR.
The analysts concluded that both Cardinal Health and McKesson, as non-cyclical 12-14% EPS CAGR companies, have the potential to see their price-to-earnings (P/E) ratios rise compared to the S&P forward P/E of 21 times. The price target of $140 is based on approximately 10.5 times FY25 EBITDA.
In other recent news, Cardinal Health has been the focus of several significant developments. The company's stock was upgraded from Neutral to Buy by BofA Securities, which also raised the price target to $145, citing expectations of an upside to EPS estimates. This followed a period of notable organic growth in Cardinal Health's core pharmaceutical segment.
The company also revealed plans to acquire Integrated Oncology Network for $1.1 billion and successfully raised $2.9 billion through a public offering of senior notes to partially finance the planned acquisitions of The GI Alliance Holdings, LLC, and Advanced Diabetes Supply Group. Despite a 4% decrease in total revenue, Cardinal Health announced an increase in earnings per share (EPS) and adjusted free cash flow expectations for fiscal year 2025.
In addition, T2 Biosystems (NASDAQ:TTOO) decided to license its sepsis detection technology following a commercial agreement with Cardinal Health. Meanwhile, Mizuho (NYSE:MFG) Securities initiated coverage on Cardinal Health shares, recommending an Outperform rating.
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