Argus Cites Cardinal Health's Margin Improvements In Upgrade

Cardinal Health Inc (NYSE: CAH) showed an improvement in gross margin in its fiscal second-quarter earnings report, and investors should have confidence in the company's ability to drive even more expansion, according to Argus.

The Analyst

Argus' David Toung upgraded Cardinal Health's stock rating from Hold to Buy with a new $85 price target.

The Thesis

Cardinal Health's Q2 report showed a 43-basis point improvement in gross margin from the same quarter a year ago and a 17-basis point expansion from the prior quarter, Toung said in the upgrade note. This occurred at a time when the company is incurring extra costs, as it is looking for new exam glove suppliers and investing in its overseas manufacturing and distribution infrastructure, the analyst said.

Encouragingly, these costs will diminish over time and should result in incremental margin growth, Toung said. 

Cardinal's improving profitability "is a sign that downstream pricing pressures, which have plagued the pharma industry — and Cardinal in particular — over the past two years have abated." 

Cardinal Health's stock is trading at 10.3x the analyst's fiscal 2019 EPS estimate which represents an "attractive valuation" given the following, Toung said:

• Recent strong performance.
• Expectations for margin expansion.
• A discount to the group average of 10.8x among health care distributors.

Price Action

Shares of Cardinal Health were trading lower by 3.5 percent at the time of publication Monday. 

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