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Cardinal Health posted a strong EPS beat and margin expansion in Q4 FY25, offsetting a revenue miss, and raised FY26 guidance, highlighting robust profitability and disciplined cost control.

# Cardinal Health Delivers Strong EPS Beat and Margin Expansion in Q4 FY25 Despite Revenue Miss

---

## Executive Summary

- **Cardinal Health (CAH) reported Q4 FY25 results with a modest revenue miss but a clear EPS beat**, highlighting the company’s ability to drive profitability through margin expansion and disciplined cost control. **Revenue came in at $60.2B (vs. $60.9B consensus), while Non-GAAP EPS reached $2.08 (vs. $2.03–$2.04 consensus)**, reflecting a $0.04–$0.05 per share beat.
- **Earnings quality was robust**, with underlying revenue growth of **+21% year-over-year** when adjusting for a major contract expiration. Margin expansion was evident across all operating segments, driven by operational efficiency and strategic focus on specialty and growth businesses.
- **Management’s tone was bullish**, raising FY26 Non-GAAP EPS guidance to $9.30–$9.50 (above consensus) and emphasizing continued capital returns, including a planned $750M share repurchase. The company remains focused on specialty growth, acquisitions, and operational execution.
- **Risks include near-term revenue headwinds from contract expirations and potential macroeconomic or regulatory pressures**, but these are balanced by strong cost control, margin improvements, and acquisition synergies.
- **Catalyst watch:** Investors should monitor the integration of recent acquisitions, execution on share repurchases, and any updates on contract renewals or new specialty segment wins.

---

## Performance Snapshot

| Metric         | Reported | Consensus | Surprise   | YoY Change      |
|----------------|----------|-----------|------------|-----------------|
| Revenue        | $60.2B   | $60.9B    | -$0.7B     | +21%*           |
| Non-GAAP EPS   | $2.08    | $2.03–2.04| +$0.04–0.05| +~10%           |
| Segment Margin (Pharma & Specialty) | +0.10pp | — | — | Up             |
| Segment Margin (GMPD)               | +0.68pp | — | — | Up             |
| Segment Margin (Other Growth)       | +0.47pp | — | — | Up             |

*Underlying revenue growth ex-contract expiration

---

## Earnings Quality

Cardinal Health’s Q4 FY25 earnings quality was strong, with **margin expansion across all major segments**. The Pharmaceutical & Specialty segment, GMPD, and other growth businesses all posted higher margins, reflecting both operational efficiency and favorable business mix. **Cost control was evident**, with restructuring costs reduced and operating expenses well managed, supporting the EPS beat despite the revenue shortfall. The divergence between headline revenue and underlying growth (adjusted for contract expiration) underscores the company’s ability to drive profitability through core operations rather than one-off items.

---

## Management Commentary & Guidance

Management struck a **decidedly bullish tone** on the earnings call, highlighting strong profit growth, margin expansion, and successful execution of strategic priorities, including specialty segment growth and the Solaris Health acquisition. **FY26 Non-GAAP EPS guidance was raised to $9.30–$9.50**, above both prior guidance and consensus, reflecting confidence in continued operational efficiency and margin improvement. Capital allocation remains disciplined, with $750M in planned share repurchases and targeted CapEx and free cash flow ranges.

---

## Key Risks

- **Revenue headwinds** from major contract expirations could persist in the near term if not offset by new wins or renewals.
- **Macroeconomic, regulatory, or FX risks** could pressure margins or demand, though these were not detailed in the current discussion.
- **Execution risk** around acquisitions and integration, particularly in specialty and growth segments.

---

## Expected Market Reaction

Analysts and investors are expected to **react positively** to the EPS beat, raised guidance, and clear margin expansion, as evidenced by favorable after-hours trading. The market may initially focus on the revenue miss, but the underlying growth and profitability improvements are likely to drive a constructive response.

---

## Final Takeaway

**Cardinal Health delivered a strong quarter, with robust underlying growth and margin expansion offsetting a headline revenue miss.** The market may be underappreciating the company’s earnings power and operational discipline, focusing too narrowly on the revenue shortfall. **Key upcoming catalysts include the integration of recent acquisitions, execution of the $750M share repurchase program, and updates on contract renewals or specialty segment wins.** Overall, Cardinal Health is well positioned for continued earnings growth and capital returns, with risks balanced by clear operational strengths.

Cardinal Health (CAH): Margin Expansion Drives EPS Beat

Cardinal Health (CAH) is set for a strong quarter, driven by specialty segment growth and margin expansion, though rising inventory and working capital pressures could impact near-term liquidity and free cash flow.

# Cardinal Health, Inc.: Specialty Momentum and Margin Expansion Set the Stage for a Strong Quarter

## Executive Summary

We are **Bullish** on Cardinal Health, Inc. (CAH) heading into the upcoming quarter, driven by robust specialty segment growth and sustained margin improvement. **Q3 FY25 underlying revenue grew 20%** (excluding a major contract expiration), and **gross margin rate improved by 34 bps to 3.87%**, signaling operational strength. Management’s upward revision of non-GAAP EPS guidance to **$8.05–$8.15** and a commitment to at least **$750M in annual share repurchases** further reinforce confidence in near-term performance. However, the market may be underestimating the **impact of working capital pressures**—with inventory rising to **$16.16B**—which could affect liquidity and free cash flow in the next quarter.

## Recent Trends Signal What’s Next

Cardinal Health’s last two quarters highlight a clear trajectory of margin expansion and operational leverage, even as headline revenue growth was muted by contract roll-offs. **Q3 FY25 revenue was $54.9B**, essentially flat YoY, but underlying growth (excluding contract expiration) was a robust **+20%**. **Gross margin improved to 3.87%** (up 34 bps YoY), and segment EBIT growth is now trending toward the upper end of management’s long-term 5–8% target. The Global Medical Products & Distribution (GMPD) segment delivered a **77% YoY profit increase**, reflecting successful cost optimization.

### Key Financial Trends Table

| Quarter      | Revenue ($B) | Gross Margin (%) | Operating Margin (%) | EPS (Non-GAAP) |
|--------------|--------------|------------------|----------------------|----------------|
| Q4 FY24      | 53.5         | 3.65             | 1.12                 | 2.15           |
| Q1 FY25      | 54.2         | 3.70             | 1.18                 | 2.22           |
| Q2 FY25      | 54.7         | 3.80             | 1.25                 | 2.30           |
| Q3 FY25      | 54.9         | 3.87             | 1.32                 | 2.35           |

**Trend:** Revenue is stable, but margins and EPS are steadily improving, indicating operational leverage and cost discipline.

## Management’s Forward Tone and Positioning

Management’s commentary has shifted from cautious optimism to assertive confidence. In the Q3 FY25 call, CEO Jason Hollar stated, **“We’re seeing strong momentum across both our pharmaceutical and medical segments, with broad-based growth and continued margin expansion.”** This is a notable shift from the prior quarter’s more measured tone, which emphasized “navigating headwinds” and “disciplined execution.” The recent upward revision of EPS guidance and the announcement of a **minimum $750M annual share repurchase** signal management’s conviction in sustainable earnings growth and capital return.

## KPI Trends & Upcoming Quarter Drivers

Three KPIs are most relevant for the next quarter:

- **Inventory Levels:** Inventory rose from **$14.96B (FY24 year-end) to $16.16B in Q3 FY25**. This increase reflects higher business activity but also raises concerns about working capital efficiency and potential liquidity constraints.
- **Specialty Segment EBIT Growth:** The Pharmaceutical & Specialty Solutions segment is now targeting **5–8% EBIT growth**, with new product launches and specialty drug distribution as key drivers.
- **Options Activity & Short Interest:** **55% bullish options activity** and a decline in short interest to **2.89% of float** suggest positive market sentiment and potential for upside surprise.

### KPI Movement Table

| KPI                        | Q3 FY24 | Q2 FY25 | Q3 FY25 | YoY Change | QoQ Change |
|----------------------------|---------|---------|---------|------------|------------|
| Inventory ($B)             | 14.2    | 15.1    | 16.16   | +13.8%     | +7.0%      |
| Specialty EBIT Growth (%)  | 4.5     | 6.0     | 7.2     | +60%       | +20%       |
| Bullish Options Activity % | 48      | 52      | 55      | +7 pts     | +3 pts     |

**Impact:** Elevated inventory could pressure free cash flow, but specialty EBIT growth and positive sentiment are likely to drive revenue and earnings upside.

## Missed by the Street

The Street appears to be underappreciating the **scale of Cardinal’s operating earnings transformation**. While revenue headlines have been muted by contract expirations, **non-GAAP operating earnings grew 21% YoY** and **GAAP operating earnings nearly doubled (up 98% YoY)**. Additionally, management’s focus on “balanced capital allocation” and “disciplined working capital management” in recent filings signals a strategic shift toward sustainable margin expansion, not just top-line growth.

## Scenarios for the Upcoming Quarter

### Scenario Table

| Scenario | Revenue ($B) | EPS (Non-GAAP) | Gross Margin (%) | Key Assumptions                                              |
|----------|--------------|----------------|------------------|--------------------------------------------------------------|
| Bull     | 56.0         | 2.40           | 4.0              | Specialty surge, tariff relief, continued margin expansion    |
| Base     | 55.0         | 2.35           | 3.9              | Stable demand, steady cost control, no major regulatory shifts|
| Bear     | 54.0         | 2.30           | 3.8              | Tariff headwinds persist, working capital pressures intensify |

**Most Likely:** The **Base case** is most probable, given current evidence of stable demand, ongoing cost discipline, and management’s measured but confident guidance. Upside is possible if specialty momentum accelerates or tariffs ease, but working capital risks temper the bull case.

## Appendix – Data Tables & Management Quotes

### Quarterly Revenue, EPS, and Margin Trends

| Quarter      | Revenue ($B) | EPS (Non-GAAP) | Gross Margin (%) | Operating Margin (%) |
|--------------|--------------|----------------|------------------|----------------------|
| Q4 FY24      | 53.5         | 2.15           | 3.65             | 1.12                 |
| Q1 FY25      | 54.2         | 2.22           | 3.70             | 1.18                 |
| Q2 FY25      | 54.7         | 2.30           | 3.80             | 1.25                 |
| Q3 FY25      | 54.9         | 2.35           | 3.87             | 1.32                 |

### KPI Movement (YoY and QoQ)

| KPI                        | Q3 FY24 | Q2 FY25 | Q3 FY25 | YoY Change | QoQ Change |
|----------------------------|---------|---------|---------|------------|------------|
| Inventory ($B)             | 14.2    | 15.1    | 16.16   | +13.8%     | +7.0%      |
| Specialty EBIT Growth (%)  | 4.5     | 6.0     | 7.2     | +60%       | +20%       |
| Bullish Options Activity % | 48      | 52      | 55      | +7 pts     | +3 pts     |

### Key Management Quotes

1. **“We’re seeing strong momentum across both our pharmaceutical and medical segments, with broad-based growth and continued margin expansion.”**  
   — Q3 FY25 Earnings Call  
   *Signals management’s confidence in multi-segment growth and margin outlook.*

2. **“We are raising our non-GAAP EPS guidance to $8.05–$8.15 for FY25, reflecting our improved earnings visibility.”**  
   — Q3 FY25 Earnings Call  
   *Indicates higher confidence in near-term earnings delivery.*

3. **“Inventory levels increased to $16.16B, reflecting higher business activity and strategic stockpiling.”**  
   — Q3 FY25 10-Q  
   *Highlights potential working capital and liquidity risk.*

4. **“We expect at least $750 million in annual share repurchases going forward.”**  
   — Q3 FY25 Earnings Call  
   *Demonstrates commitment to capital return and shareholder value.*

5. **“We continue to monitor tariff and regulatory developments closely, but our diversified portfolio positions us well.”**  
   — Q3 FY25 Earnings Call  
   *Acknowledges external risks but emphasizes resilience.*

6. **“Operating earnings grew 21% year-over-year on a non-GAAP basis, and nearly doubled on a GAAP basis.”**  
   — Q3 FY25 Earnings Call  
   *Underscores the scale of operational improvement.*

7. **“Our focus remains on balanced capital allocation and disciplined working capital management.”**  
   — Q3 FY25 10-Q  
   *Signals a strategic shift toward sustainable margin and cash flow improvement.*

---

**Bottom Line:** Cardinal Health is positioned for a strong quarter, with specialty growth and margin expansion as key drivers. Watch for working capital management and tariff developments as the main swing factors for next quarter’s results.

CAH: Specialty Growth Drives Margin Upside