Cardinal Health (NYSE: CAH) saw its shares rise 3.6% to $245.64 in premarket trading on Wednesday, approaching an all-time high, after the company issued fiscal 2027 earnings guidance that exceeded Wall Street expectations. The upbeat forecast, however, was tempered by a projected 25% drop in free cash flow, raising questions about the sustainability of the company's growth trajectory.
Strong Earnings Forecast
The Dublin, Ohio-based healthcare distributor projects adjusted earnings per share (EPS) for fiscal 2027 to be in the range of $12.40 to $12.60. The midpoint of $12.50 is 3.5% higher than the $12.08 consensus estimate reported by The Wall Street Journal, signaling robust profit growth ahead.
This guidance comes on the heels of a strong fiscal fourth quarter, where adjusted EPS came in at $2.91, beating the $2.42 consensus from Barron's. The quarter included a one-time tariff refund of $0.31 per share, which, when excluded, puts normalized EPS at $2.60. Revenue for the quarter totaled $63.67 billion, a 6% increase year-over-year but slightly below the $65.15 billion estimate.
Cash Flow Concerns
Despite the earnings beat, the company's cash generation outlook is less rosy. Adjusted free cash flow for fiscal 2026 was $5.0 billion, but management anticipates a range of $3.5 billion to $4.0 billion for fiscal 2027—a 25% decline at the midpoint. This anticipated reduction in cash flow could pressure the company's ability to fund future investments and shareholder returns.
Chief Executive Jason Hollar noted, "Fiscal 2026 was a standout year for Cardinal Health and I am pleased with our strong fourth quarter results." The company highlighted that each operating segment achieved double-digit profit growth before accounting for tariff recoveries.
Segment Performance
The Pharmaceutical and Specialty Solutions segment, which accounts for the bulk of revenue, grew 6% to $58.8 billion, with segment profit up 21% to $645 million, driven by strong specialty drug demand. The Global Medical Products and Distribution segment saw revenue dip 2% to $3.1 billion, but segment profit more than doubled to $150 million, partly due to tariff recoveries. Other segments grew revenue 7% to $1.7 billion, with profit up 14% to $183 million.
Margins improved across the board. Gross margin rose to 4.02% from 3.66% in the prior-year quarter, while GAAP operating margin expanded to 1.14% from 0.71%.
Capital Returns and Share Repurchases
Cardinal Health remains committed to returning capital to shareholders. In fiscal 2026, the company repurchased $1.4 billion in shares. The board has approved an additional $5.0 billion for repurchases, bringing total authorization to $6.4 billion. For fiscal 2027, the company expects to buy back approximately $1.0 billion in shares, a 28.6% reduction from the prior year.
Capital spending is projected at roughly $700 million for fiscal 2027.
Market Context and Analyst Views
Analysts have a generally positive outlook on the stock. According to MarketBeat, 18 analysts rate it a buy, with an average price target of $251.73, implying about 2.5% upside from the current premarket level. StockAnalysis data shows 17 analysts with a strong buy or buy rating and an average target of $252.40, suggesting 2.8% upside.
Competitors McKesson (NYSE: MCK) and Cencora (NYSE: COR) also benefit from the specialty pharmaceuticals trend, but Cardinal Health's faster profit growth and significant share repurchase authorization set it apart, albeit with the caveat of lower cash flow.
Risks and Outlook
Investors should be mindful of potential risks, including margin volatility due to branded-drug pricing, contract renewals, generic price declines, and tariffs. Supply chain delays or legal actions could also impact cash flow. With the stock trading near its all-time high, there is limited margin for error.
The key metric to watch will be cash conversion. Specialty profit must accelerate sufficiently to support the 14.2% midpoint EPS growth, especially as adjusted free cash flow is projected to decline to around $3.75 billion.
