Cardinal Health is the IBD Stock Of The Day as a drug distribution sector rally sends CAH stock within striking distance of two potential entries.
The company is one of the "Big Three" involved in distributing drugs, medical devices and supplies — alongside McKesson and AmerisourceBergen. They buy medicine and supplies at wholesale prices and then distribute them to hospitals, pharmacies and doctors' offices. Estimates suggest they control north of 90% of the market in the U.S.
Cardinal Health has experienced a shake-up recently after activist investor Elliott Management came into the picture. The move prompted several board changes. The company's previous chief executive also retired. Further, Cardinal Health agreed to undergo a strategic review that could see changes to its struggling medical supplies division.
Now, CAH stock is in a flat base with a buy point at 81.67, according to MarketSmith.com. A move above 81.48 could also offer a slightly lower entry. Shares are finding support at their 21-day moving average.
Shares edged up 0.3% to close at 79.58 on the stock market today.
CAH Stock: Recession-Proof Businesses
Drug distributors are enjoying a lengthy day in the sun. Overall, shares of IBD's seven-company Medical-Wholesale Drug/Supply industry group hit a multidecade-high early this month. Shares have backed off somewhat in the weeks since, but the macro environment remains promising.
In February, the drug distributors signed onto a $21 billion agreement to settle litigation around the opioid epidemic. The three companies will split that amount over 18 years. Jefferies analyst Brian Tanquilut says that acted as a clearing event for investors to get back into the stocks.
Since then, CAH stock has steadily risen more than 46% — outperforming 36% and 18% gains for McKesson and AmerisourceBergen stocks, respectively.
Tanquilut also notes the three companies are cash-flow generating machines with revenue tied to largely recession-proof areas. Today, Cardinal Health's growth lies in its pharmaceuticals division. In the September quarter, sales in that business jumped 15% to $45.8 billion. Meanwhile, the medical supplies business continues to struggle. Sales slipped 9% to $3.8 billion.
"They have a lot of assets inside Cardinal Health that probably aren't being valued appropriately because they're all being lumped together," Tanquilut told Investor's Business Daily. "I think investors are thinking there could be some value unlocked because of that ongoing strategic review process."
Cardinal Health is solidly profitable. For fiscal 2023 ending in June, CAH stock analysts expect the company to earn $5.33 per share, minus some items, on $201.19 billion in sales. Profits would pop more than 5% and sales would grow 11%, according to FactSet.
Highly Rated Medical Stock
Gauging value inside the drug distributors is tricky, Tanquilut says. The companies don't offer a deep breakdown into what's driving growth beyond their segment reports.
Cardinal Health's medical supplies business is struggling. But the company is also the largest distributor of continuous glucose monitors in the country. Continuous glucose monitors, or CGMs, are body-worn devices that help people with diabetes keep tabs on their blood sugar in real time.
Companies like Dexcom, Abbott Laboratories and Medtronic are reporting strong growth for their CGMs.
"That has value, just for that reason," Tanquilut said. "Putting a high-growth product like that inside a slower-growing drug distributor, you're not getting credit for that business. That's what they're trying to figure out; is this an important piece of the business we could keep or divest?"
CAH stock is also highly rated, according to IBD Digital.
Shares have a Composite Rating of 90, which puts them in the leading 10% of all stocks in terms of fundamental and technical measures. The stock also has a Relative Strength Rating of 97, meanings its 12-month performance ranks in the top 3% of all stocks.
Follow Allison Gatlin on Twitter at @IBD_AGatlin.
