Among Its Peers, Cardinal Health Could Be The Most Exposed To 'Amazon Risk'

Amazon.com, Inc. AMZN poses an existential threat to a host of retailers, and even to companies outside the retail arena. Drug distributor Cardinal Health Inc CAH could be one among them, according to Morgan Stanley.

The Analyst

Morgan Stanley analyst Ricky Goldwasser downgraded her rating on Cardinal Health from Equal-weight to Underweight and reduced the price target from $72 to $51.

The Thesis

Cardinal Health has "outsized exposure" to Amazon compared to its peers via its medical supply segment, Goldwasser said in a Sunday note. (See Goldwasser's track record here.)

Amazon's recent hires and public statements suggest the company is seeking to scale its medical supply distribution efforts, Goldwasser said.

This will help Amazon compete head-to-head with primary source distributors such as Cardinal, the analyst said.
Cardinal's potential earnings risk is still underappreciated despite the recent sell-off in the company's shares, according to Morgan Stanley. After consolidating for about two months since mid-August, Cardinal Health shares have been on a steep downward trajectory since late October.

"While Cardinal's revenue exposure to commoditized medical supplies is limited (8 percent of revenue), the fixed cost distribution model creates a greater headwind to earnings, in a more competitive pricing environment scenario, than we believe is appreciated," Goldwasser said.

Morgan Stanley estimates every 1 percent of price concession translated to a 4 percent earnings headwind. As Amazon steps on the gas and builds infrastructure, price competition is likely a matter of time, the analyst said.

Reflecting the competitive dynamics, Morgan Stanley updated its EPS estimates for Cardinal Health in 2018, 2019 and 2020, taking them below the consensus expectations.