Cardinal Health (CAH) | Week Day 1: Capital Structure-JP Morgan

The rating on Cardinal Health shares is Neutral, with a positive longer-term outlook for the drug distribution industry. While the broader drug distribution business has stabilized, near-term headwinds around elevated supply chain costs in the Medical segment remain. Despite this, several factors should drive a positive tailwind for Cardinal over the longer term, including stabilization in the Pharma business, potential operational improvements in the Medical business, cost-saving initiatives, and accretive uses of cash flow. A Dec 2023 price target of $93 is based on a 13.5x multiple on the CY24 adjusted EPS estimate of $6.92, with the Medical segment expected to incrementally contribute more over the coming quarters.

Cardinal Health (CAH) has been focusing on deleveraging over the past few years, which has led to a decline in its leverage ratio. As of the end of F3Q23, the company's total debt was $4.7B, down from over $9B in FY18, and its gross debt/EBITDA ratio was 2.0x, down from ~3x at the end of FY18. CAH has significant liquidity based on cash on hand and borrowing capacity, with ~$4.0B in cash and equivalents and $5.0B in credit facilities as of the end of F3Q23. The company has historically generated strong free cash flow and has financial flexibility to deploy capital opportunistically for future growth, returning cash to shareholders, and maintaining a healthy balance sheet.

The company has deployed ~$13.7B in capital from F2018-F2022 on acquisitions, share repurchases, dividends, and capex. CAH plans to continue deploying capital opportunistically, with $1.75B of share repurchases projected in F2023E and an additional $0.75B in F2024E. The company also has a leading dividend yield of 2.4%, above its peers ABC and MCK. Every $0.2B of share repo above the current F2024E forecast could drive a ~0.9% tailwind to adjusted EPS estimate if it is front-loaded in F1Q23.

While FY24's guidance for ~$2B in free cash flow is slightly down from FY23's $2.0B-$2.3B, management has attributed this reduction to timing. CAH does not provide operating cash flow guidance, and timing can drive volatility in distributor cash flows. However, with a solid balance sheet and strong cash flow, the company has a high degree of financial flexibility and is expected to maintain a healthy balance sheet while continuing to deploy capital opportunistically.