Cardinal Health (CAH)

Healthcare distributor and services company Cardinal Health (NYSE:CAH) reported Q3 CY2025 results exceeding the market’s revenue expectations, with sales up 22.4% year on year to $64.01 billion. Its non-GAAP profit of $2.55 per share was 17.3% above analysts’ consensus estimates.

Company Overview

Operating as a critical link in the healthcare supply chain since 1979, Cardinal Health (NYSE:CAH) distributes pharmaceuticals and manufactures medical products for hospitals, pharmacies, and healthcare providers across the global healthcare supply chain.

Healthcare distributors operate scale-driven business models that thrive on high volumes. Their recurring revenue streams from contracts with hospitals, pharmacies, and healthcare providers provide stability, but profitability can be squeezed by powerful stakeholders on both sides (suppliers and customers), pricing pressures, and regulatory changes. Looking ahead, the sector is positioned for growth due to increasing demand for healthcare services driven by an aging population and advancements in medical technology. However, rising operational costs, potential drug pricing reforms, and supply chain vulnerabilities present potential headwinds. Additionally, the push for digitalization and value-based care creates opportunities for innovation but requires significant investment to remain competitive.

Cardinal Health's primary competitors in pharmaceutical distribution include McKesson Corporation and Cencora, Inc. (formerly AmerisourceBergen). In the medical products segment, it competes with Medline Industries, Inc., Owens & Minor, Inc., and Becton, Dickinson and Company.

Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.

With $234.3 billion in revenue over the past 12 months, Cardinal Health is one of the most scaled enterprises in healthcare. This is particularly important because healthcare distribution & related services companies are volume-driven businesses due to their low margins.

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Luckily, Cardinal Health’s sales grew at a decent 8.7% compounded annual growth rate over the last five years. Its growth was slightly above the average healthcare company and shows its offerings resonate with customers.

Long-term growth is the most important, but within healthcare, a half-decade historical view may miss new innovations or demand cycles. Cardinal Health’s recent performance shows its demand has slowed as its annualized revenue growth of 5.6% over the last two years was below its five-year trend.

This quarter, Cardinal Health reported robust year-on-year revenue growth of 22.4%, and its $64.01 billion of revenue topped Wall Street estimates by 7.8%.

Looking ahead, sell-side analysts expect revenue to grow 8.3% over the next 12 months, an improvement versus the last two years. This projection is particularly healthy for a company of its scale and suggests its newer products and services will spur better top-line performance.

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Cardinal Health’s operating margin might fluctuated slightly over the last 12 months but has generally stayed the same. The company broke even over the last five years, lousy for a healthcare business. Its large expense base and inefficient cost structure were the main culprits behind this performance.

Analyzing the trend in its profitability, Cardinal Health’s operating margin might fluctuated slightly but has generally stayed the same over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, Cardinal Health generated an operating margin profit margin of 1%, in line with the same quarter last year. This indicates the company’s overall cost structure has been relatively stable.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Cardinal Health’s remarkable 9.4% annual EPS growth over the last five years aligns with its revenue performance. This tells us its incremental sales were profitable.

In Q3, Cardinal Health reported adjusted EPS of $2.55, up from $1.88 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Cardinal Health’s full-year EPS of $8.91 to grow 9.7%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Cardinal Health has shown mediocre cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 1.3%, subpar for a healthcare business.

Taking a step back, an encouraging sign is that Cardinal Health’s margin expanded by 1.2 percentage points during that time. The company’s improvement shows it’s heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose while its operating profitability was flat.

Cardinal Health’s free cash flow clocked in at $865 million in Q3, equivalent to a 1.4% margin. Its cash flow turned positive after being negative in the same quarter last year, building on its favorable historical trend.

Cardinal Health reported $4.59 billion of cash and $9.03 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $3.37 billion of EBITDA over the last 12 months, we view Cardinal Health’s 1.3× net-debt-to-EBITDA ratio as safe. We also see its $70 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Cardinal Health blew past analysts’ revenue expectations this quarter. We were also glad its EPS outperformed Wall Street’s estimates. The company also lifted full-year EPS guidance, which is icing on the cake. Zooming out, we think this quarter featured some important positives. The stock traded up 10.7% to $182.25 immediately after reporting.

Updated: December 4, 2025 at 11:09 PM EST

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Cardinal Health.

There are definitely a lot of things to like about Cardinal Health. First off, its revenue growth was decent over the last five years and is expected to accelerate over the next 12 months. And while its operating margins are low compared to other healthcare companies, its scale makes it a trusted partner with negotiating leverage. On top of that, its remarkable EPS growth over the last five years shows its profits are trickling down to shareholders.

Cardinal Health’s P/E ratio based on the next 12 months is 20x. When scanning the healthcare space, Cardinal Health trades at a fair valuation. For those confident in the business and its management team, this is a good time to invest.

Wall Street analysts have a consensus one-year price target of $214.71 on the company (compared to the current share price of $198.78), implying they see 8% upside in buying Cardinal Health in the short term.