Cardinal Health Inc
On Cardinal Health Inc. (NYSE: CAH) is HOLD. The company’s medical segment has benefited from the pandemic through sales of lab testing products and PPE. However, its larger pharmaceutical segment (90% of revenue) has been hurt by lower demand for generic drugs and nuclear medicine products. The company has also been named in several lawsuits for its role in the U.S. opioid epidemic. The outcome of the case may set precedent for hundreds of similar lawsuits that have been filed across the country.
The gross profit declined 4% to $1.8 billion and the gross margin declined 20 basis points to 4.6%. Non-GAAP operating earnings declined 4% to $689 million, while non-GAAP net earnings fell 5% to $451 million. Operating cash flow declined 83% to $277 million.
The company’s lab business and PPE products have benefited from the pandemic. In fiscal 2Q21, Cardinal Health closed deals with the CDC and the State of Ohio. In Ohio, Cardinal Health OptiFreight Logistics will support vaccine distribution in the state.
Cardinal Health is one of three defendants in a lawsuit which alleges that the company flooded the market with opioids during the U.S. opioid epidemic. A trial is underway in West Virginia where two local governments are seeking $1 billion to help them address the toll that opioid addiction inflicted on their communities. The outcome of the case may set precedent for hundreds of similar lawsuits that have been filed across the country. Along with its 3Q results, the company narrowed its FY21 guidance to adjusted EPS of $5.90-$6.05 from $5.85-$6.10. The midpoint of guidance reflects 10% EPS growth.
EARNINGS & GROWTH ANALYSIS
Pharmaceutical (89% of 3Q sales) and Medical (11%). Third-quarter business trends for these segments are discussed below. Pharmaceutical sales of $35.1 billion were flat with the prior year, reflecting a decline in sales of antibiotics, antivirals and pain meds due to the lower incidence of flu and other ailments this season. Segment profit declined 4% to $511 million due to volume declines.
SG&A expense fell 4% to $1.1 billion, reflecting expense management, and was 2.9% of sales. Litigation charges related to opioid proceedings were $15 million and were less than 1% of sales. For FY22, we are maintaining our estimate of $6.20.
FINANCIAL STRENGTH & DIVIDEND
The company has no outstanding borrowings under its credit facilities. Total debt of $6.7 billion and the debt-to-equity ratio of 79% were consistent with the prior year.
CAH’s plans to pay its next debt maturity of $1.4 billion, due in June 2022, with cash. The board recently approved a dividend increase of 1% for FY22. We are lowering our FY22 dividend estimate to $1.96 from $2.00. Management said that during the quarter the company repurchased $200 million shares.
On the fundamentals, CAH shares are trading at 9.4-times our FY21 EPS estimate and 9.1-times our FY22 estimate, at the bottom of their five-year historical range of 9-19 and below the peer average. They are also trading at a price/sales ratio of 0.1 compared to a peer average of 0.8. We believe that CAH is fairly valued given the company’s near-term challenges and that a HOLD rating is appropriate. We will look to upgrade the stock to BUY on signs of organic growth in the absence of COVID-19 and a favorable outcome from current litigation.
Allscripts Healthcare Solutions Inc. (NGS: MDRX) is HOLD. The company’s cloud-based solutions have helped to meet the changing needs of patients and healthcare providers during the pandemic. However, Allscripts has been unable to meaningfully grow sales, and earnings have been driven mainly by headcount reductions and stock buybacks. Management expects flat sales this year along with continued discipline on costs.
Allscripts recently reported 1Q21 results. The company reported adjusted non-GAAP revenue of $368 million, down 3.4% from the prior year after excluding results from divested businesses. Adjusted EPS rose 85%. Adjusted EBITDA of $67 million rose 81% on a pro forma basis. Bookings (which exclude client renewals) rose 6% to $194 million, but the contract revenue backlog declined slightly to $4 billion.
It also sold its CarePort Health business to WellSky Corp. a global health and community care technology company, for $1.35 billion – more than 13-times CarePort’s trailing 12-month revenue. The company used the proceeds from these sales for business development, debt reduction, and stock buybacks. Management believes that Allscripts has the largest linked electronic health records (EHR) patient claims database, and expects its database-enabled research services to help it capture a larger share of the value chain.
In 2020, Allscripts’ Veradigm business unit led the development of a monthly EHR-based coronavirus reporting system – with the goal of determining whether COVID infection conferred immunity. All major electronic health record systems now contribute to this report. The company’s data is being used by vaccine manufacturers to monitor vaccinated populations for potential safety issues. It is also being used by medical researchers to assess new treatments and develop machine-learning approaches to combat COVID-19. Allscripts has been recognized by Black Book as the top company in its 2021 Community Health Systems Vendors Report. This is the fifth straight year that the company has received this recognition. Black Book’s survey gives Allscripts high marks for providing cloud technology tools and other support to smaller healthcare organizations. Management has reaffirmed 2021 revenue guidance of $1.5 billion, flat with the prior year, and its adjusted EBITDA forecast of $240-$260 million. It also expects free cash flow of $90-$100 million.
EARNINGS & GROWTH ANALYSIS
In the Software Delivery, Support, and Maintenance segment, revenue fell 4% to $223 million. The non-GAAP gross profit from continuing operations was $130 million and the gross margin fell 220 basis points to 58.3%.
In the Client Services segment, revenue fell 2% to $146 million. The non-GAAP gross profit from continuing operations came to $29 million and the gross margin was 19.8%, up 1600 basis points. The overall non-GAAP gross margin rose 480 basis points to 43.1%, and the adjusted EBITDA margin rose 860 basis points to 18.3%. R&D expenses of $49 million were 13% of sales, down 230 basis points. As part of its margin-improvement plan, the company reduced headcount in 2020, taking a charge of $66 million for the year. We expect a modest increase to $0.78 in 2022.
FINANCIAL STRENGTH & DIVIDEND
Total long-term debt and operating lease liabilities declined slightly to $280 million from the prior year. Debt accounted for just 14% total capitalization, down from 4Q20. The company paid off more than $700 million in balance sheet obligations in 2020.
It repurchased $280 million of its stock in 4Q20, bringing the full-year total to $350 million.
MANAGEMENT & RISKS
Michael Klayko is the company’s chairman. Investors in MDRX shares face risks.
We are maintaining our HOLD rating, but would consider an upgrade on signs of renewed sales and earnings growth.