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Cardinal Health, Inc. CAH reported second-quarter fiscal 2025 adjusted earnings per share (EPS) of $1.93, which beat the Zacks Consensus Estimate of $1.75 by 10.3%. The bottom line also improved 2.1% year over year.

GAAP EPS in the quarter was $1.65 compared with $1.50 in the year-ago period.

Revenue Details

Sales declined 3.8% on a year-over-year basis to $55.26 billion. However, the top line beat the Zacks Consensus Estimate by 0.7%.

Segmental Analysis

Pharmaceutical and Specialty Solutions

Pharmaceutical revenues decreased 4.4% to $50.85 billion on a year-over-year basis. The decline was due to the unfavorable impact of the customer contract expiration with OptumRx in June 2024. Excluding this impact, sales were up 17%, driven by branded and specialty pharmaceutical sales growth from existing Pharmaceutical Distribution and Specialty Solutions customers.

Pharmaceutical profit totaled $531 million, up 7% from the year-ago period. The upside was driven by growth from BioPharma Solutions, including contributions from Specialty Networks and higher contributions from brand and specialty products. This growth was partially offset by the customer contract expiration.

Global Medical Products and Distribution

Revenues in this segment totaled $3.15 billion, up 0.9% year over year, driven by growth volume from existing customers.

The segment reported a profit of $18 million compared with $11 million in the year-ago quarter. This upside was primarily driven by cost optimization initiatives, partially offset by the write-off of uncollectible receivables in the WaveMark business.

Other

This segment includes three operating segments — at-Home Solutions, Nuclear and Precision Health Solutions, and OptiFreight Logistics. Sales totaled $1.28 billion, up 13% year over year.

The segment’s profit amounted to $118 million, up 11% from the year-ago level. The upside was driven by the robust performance of OptiFreight Logistics and Nuclear and Precision Health Solutions.

Cardinal Health, Inc. Price, Consensus and EPS Surprise

Cardinal Health, Inc. price-consensus-eps-surprise-chart | Cardinal Health, Inc. Quote

Margin Analysis

Gross profit increased 4.7% year over year to $1.94 billion.

As a percentage of revenues, the gross margin in the reported quarter was 3.5%, expanding 30 basis points year over year.

Distribution, selling, general and administrative expenses totaled $1.31 billion, up 2.9% year over year.

Operating income amounted to $549 million, up 8.7% year over year. Adjusted operating income increased 8.5% year over year to $635 million.

Financial Update

The company exited the reported quarter with cash and cash equivalents of $3.81 billion compared with $2.87 billion in the fiscal fourth quarter of 2024.

Net cash used in operating activities totaled $400 million against $1.18 billion in net cash provided in the year-ago period.

2025 View Updated

Cardinal Health raised its fiscal 2025 earnings guidance. The company now anticipates adjusted EPS between $7.85 and $8.00, up from the previous guidance of $7.75-$7.90. The Zacks Consensus Estimate for the same is pegged at $7.84.

The company expects revenues from its Pharmaceutical segment to decline 1-3% year over year from the previous guidance of a 2-4% decline. Segmental profit is likely to increase 10-12% from the previous guidance of 4-6%.

Revenues from the Medical segment are estimated to grow 2-4%. Segmental profit is expected to be in the range of $130-$150 million compared with the previous guidance of $140-175 million.

Revenues from the Other segment are likely to grow 10-12% from the previous projection of 10%. Segmental profit is likely to grow nearly 10%.

Conclusion

Cardinal Health exited the fiscal second quarter on a positive note, with earnings and revenues beating their respective Zacks Consensus Estimate. The company continued to witness strong demand for its Pharmaceutical and Specialty solutions. However, sales are likely to be under pressure due to OptumRx contract expiration.

Meanwhile, CAH’s medical products, at-Home Solutions, Nuclear and Precision Health Solutions and OptiFreight Logistics are likely to support top-line growth going forward. An improvement in segmental profit looks promising. The expansion of gross margin also bodes well.

Also, CAH announced the completion of its acquisition of a majority stake in GI Alliance. With over 900 physicians across 345 practice locations in 20 states, GI Alliance is the country's leading gastroenterology management services organization. The acquisition accelerates Cardinal Health's multi-specialty growth strategy. However, intense competition and customer concentration are concerning.

CAH’s Zacks Rank and Other Stocks to Consider

Cardinal Health carries a Zacks Rank #2 (Buy) at present.

Some other top-ranked stocks in the broader medical space are Masimo MASI, ResMed Inc. RMD and DaVita Inc. DVA.

Masimo, carrying a Zacks Rank #2 at present, has an estimated growth rate of 11.8% for 2025. MASI’s earnings surpassed estimates in each of the trailing four quarters, delivering an average surprise of 17.10%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Its shares have risen 51.4% compared with the industry’s 6.8% growth in the past year.

ResMed, carrying a Zacks Rank of 2 at present, has an estimated long-term growth rate of 14.8%. RMD’s earnings surpassed estimates in each of the trailing four quarters, with the average being 6.4%.

ResMed has gained 32.4% compared with the industry’s 16.5% growth in the past year.

DaVita, sporting a Zacks Rank of 1 at present, has an estimated long-term growth rate of 18.3%. DVA’s earnings surpassed estimates in three of the trailing four quarters and missed once, with the average surprise being 10.6%.

Zacks Investment Research

By Paul R. La Monica

Healthcare stocks have been under the weather for the past few years, underperforming the broader market's rally despite surges for obesity drugmakers Eli Lilly and Novo Nordisk. But the sector is off to a healthy start in 2025. Is the worst finally over for Big Pharma, biotechs, insurers, and medical device makers?

CVS Health — which owns insurer Aetna and pharmacy-benefits manager Caremark, along with its massive drugstore franchise — is the best-performing stock in the S&P 500 this year, surging nearly 30% as of midday Wednesday. Shares of CVS's struggling rival, Walgreens Boots Alliance, have soared more than 20% as well. Healthcare insurer Humana has risen nearly 20%. And shares of medical equipment companies DaVita, Medtronic, DexCom, Thermo Fisher, and Baxter are all sporting double-digit percentage gains in 2025.

This could be just the beginning. Many leading healthcare stocks are still playing catch-up to the broader market. The Health Care Select Sector SPDR exchange-traded fund is trading for less than 18 times earnings estimates for this year, a 20% discount to the S&P 500's price-to-earnings ratio of more than 22. The sector typically trades for only about 13% below the broader market's multiple, according to FactSet.

"The healthcare sector is cheap. It's hated," said Sandy Villere III, a portfolio manager with Villere & Co. But that's good news for bargain hunters looking for values, he said. Another plus: "You still get good yields," with many healthcare stocks paying dividends north of 1.5%, he added.

Villere said his firm is making a broad bet on the sector, with positions in Big Pharma/medical equipment company Abbott Laboratories; infusion services firm Option Care; biotech Ligand Pharmaceuticals; medical device maker Teleflex; and Idexx Laboratories, which develops diagnostic and testing products for veterinarians.

Earnings are expected to grow at a solid clip for the entire sector this year and next as well, following a big drop in 2023 and only about a 5% rebound last year. Analysts are forecasting a 20% increase for the sector's earnings in 2025 and another 10% gain in 2026.

It also appears that investors are slightly less worried about the possibility of massive changes to the sector coming from Washington.

Yes, Robert F. Kennedy, Jr. remains a worry for vaccine makers, but his confirmation as Health and Human Services secretary is far from certain. There are also lingering concerns about bipartisan legislation from Senators Elizabeth Warren and Josh Hawley that seeks to rein in the power of healthcare companies that own the big pharmacy-benefit managers, namely CVS, UnitedHealth and Cigna.

Investors should ignore the political noise. Michael Arone, chief investment strategist for State Street's SPDR Business, is predicting that healthcare stocks will beat the S&P 500 this year, saying that the sector is "ripe for an upside performance surprise."

Arone noted that the health care sector has outperformed the broader market in the first year of every Republican administration since President Ronald Reagan's inaugural year in 1981. In addition, the healthcare sector's weighting in the S&P 500 is now flirting with a 25-year low, he said.

Janus Henderson portfolio managers Andy Acker and Dan Lyons also think the market is overly fearful about potential disruption from the White House and Congress.

"There's also a tendency for healthcare stocks to assume the worst about potential policy reform, selling off before details — often more nuanced than they first appear — become clear. We think today is no exception," Acker and Lyons said in a report Wednesday.

The duo added that RFK Jr., if confirmed, won't be the only one calling the shots on healthcare policy in Washington. They noted that Kennedy would likely have little power over changes at the Food and Drug Administration and wrote that "President Donald Trump's nominee for FDA commissioner, Dr. Martin Makary, a well-respected physician, could be a counterbalancing force."

So at the end of the day, investors should focus on how cheap the sector is. Ackers and Lyons said healthcare stocks are "deeply undervalued."

"The selling is overdone, with the market not fully appreciating the acceleration of innovation in healthcare and overreacting to near-term headwinds," they wrote. "The sector could be set up for strong future returns."

Write to Paul R. La Monica at paul.lamonica@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

DaVita has an average rating of hold and mean price target of $163, according to analysts polled by FactSet.