In response to the COVID pandemic, health care companies are high on investors’ radars. After a breakout from a three-year consolidation pattern, Cardinal Health stock is worth paying attention to, especially since the company is a quality, well-established business. Moreover, Cardinal Health (NYSE:CAH) is arguably among the most undervalued health stocks today. But first, what does Cardinal actually do?
New To Cardinal Health? Here’s A Snapshot
Cardinal Health, Inc. is an American multinational health care services company and the 14th highest revenue-generating company in the nation. First founded in 1971, this company strives to improve the cost-effectiveness of health care. With solid roots in the pharmaceutical distribution industry, Cardinal Health is one of the three companies that control 90 percent of the U.S. market share — the other two being AmerisourceBergen and McKesson.
The company sells products that hospitals use daily, including bandages, gloves, thermometers and some medications. The need for medical supplies will always be there and Cardinal Health can meet demand. Two of the company’s largest customers are CVS and OptumRx, with deals locked in for 2023 and 2024, respectively.
When looking at the numbers, operating margins of just 1 percent don’t seem like a lot. But when that 1 percent is on $162 billion in annual revenue, that is a significant amount of money.
Cardinal Health’s business model has remained consistent, allowing the company to provide investors with above-average dividend yields. The company is a Dividend Aristocrat, reporting 34 years of dividend growth. While dividend increases aren’t typically large, the most recent being only 1 percent, investors are still growing their incomes by holding onto CAH stocks. This consistent dividend growth shows that Cardinal Health is a well-managed company that rewards its shareholders.
As shares of CAH plateau, many investors are looking at this stablization as a potential opportunity to buy.
Cardinal Health Competition: Few & Far Between
COVID-19 drove up stocks in the health care market among companies connected to the fight against the pandemic. However, most companies in the industry have not been impacted by a lack of involvement. Many of whom continue to grow steadily.
Cardinal Health, Inc. (CAH) is one such example. CAH fell in late 2021, nearly hitting the lows it saw in March 2020. Regardless, the company managed to grow its top line by 16 percent in fiscal 2021. Sales have improved every year since 2014.
It’s also important to note that new major future competition is not likely based on the company’s current market share, alongside the other two major players discussed above. There are significant barriers to entry in this industry based on strict regulations. Based on these variables, Cardinal Health should hold its leading position in the market for years to come.
Cardinal Health also recently reported that the company is investing in IT to optimize data capabilities to better monitor trends and develop new solutions. For example, in early 2021, Cardinal Health invested in advanced visibility solutions, partnering with FourKites. This investment supports the company’s distribution channels, including the more than 30,000 U.S. domestic deliveries Cardinal makes each day.
Is Now the Time to Buy Cardinal Health Stock?
Cardinal Health’s share price hasn’t been great or awful for a few years. The recent dip has many investors wondering if the stock is currently undervalued. Is now the time to buy?
One variable to consider is the opioid crisis, which has led to a USD 26 billion multidistrict settlement. This settlement involves Cardinal Health, McKesson and Johnson & Johnson. Based on the 3,000 file claims, Cardinal Health’s share price declined, following the company’s fourth-quarter annual results.
However, there is a good chance that the issues will be resolved. In the company’s fourth-quarter report, $149 million in expenses were recorded as part of the settlement. Again, this is making some investors undervalue the future potential of Cardinal Health.
Regardless of this issue, Cardinal Health reported operating earnings of $72 million — or $2.08 a share, resulting in the company’s stock falling. Revenue for 2021 increased six percent from the previous year. Cardinal’s consistency, strong leadership and large market share make Cardinal Health and many investors confident in the future of this company.
If you’re an investor seeking growth in your portfolio in a market full of overvalued companies, buying into a great company with a strong future outlook is generally viewed as a good investment. Since Cardinal Health’s profits are expected to more than double over the next couple of years, higher cash flow may fuel a higher share valuation.
Running the numbers on Cardinal Health, the upside is to $71.57 per share based on discounted cash flow forecast model. That translates to 38.7% upside in share price at the time of research.