Cardinal Health Removed From Goldman's Conviction List

While Cardinal Health Inc’s CAH EPS growth is tracking below target, weaker “brand price inflation presents an additional risk,” Goldman Sachs’ Robert P. Jones said in a report. He downgraded the rating on the company from Buy to Neutral, while reducing the price target from $90 to $83, and removed the stock from the Americas Conviction List

Cardinal Health’s earnings are tracking below its 3-year target of 10-15 percent. The company’s earnings growth could be further impacted by structural headwinds as a result of “a more permanent change in brand pricing.” Analyst Jones added that Cordis and Medical had not been as EPS accretive as was earlier anticipated.

Impact Of Change In Brand Pricing

Cardinal Health could record a shortfall of ~$40 million to the FY17 guidance in case brand inflation remained in the 7 percent range, since the guidance assumes 10 percent. In this scenario, brand pricing would contribute flat y/y EBIT growth from, versus the 1.5 percent contribution to growth reflected by the 10 percent inflation, Jones pointed out.

Cordis Impact

“We still see opportunity to improve margins at Cordis to be more in line with MedTech peers in the low- 20% range, vs. 18% in our model for FY17. However, this will likely take more time to realize as FX headwinds are overcome and the integration is completed on a timeline longer than anticipated,” the analyst wrote.

The EPS estimates for FY17, FY18 and FY19 EPS have been reduced from $5.65 to $5.55, from $6.35 to $6.20 and from $7.05 to $6.86, respectively.

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