Cardinal Health Inc. (CAH Free Report) is well positioned for growth thanks to a diverse product portfolio, an acquisition-driven strategy and a robust pharmaceutical segment. However, the squeeze in margins remains a concern.

This Zacks Rank # 3 (Hold) stocks are up 8.2% from the industry’s 4.8% growth over the past three months. In addition, the S&P 500 Index fell 3.7% over the same period.

The company – with a market capitalization of $ 14.82 billion – is a nationwide drug distributor and service provider to pharmacies, healthcare providers and manufacturers. He expects profits to improve 6.2% over the next five years. Cardinal Health’s profit return is 10.9% versus 3.8% for the industry.

What drives performance?

Cardinal Health’s medical and pharmaceutical offerings give it a competitive advantage in the niche area. It offers industry expertise through an expanding portfolio of safe products.

The company pursues an acquisition-driven strategy and remains committed to investing in key growth activities to gain market traction and increase profits.

Cardinal Health’s pharmaceutical segment is the second largest pharmaceutical distributor in the United States. The segment’s products and services include pharmaceutical distribution, manufacturing and specialty solutions, as well as nuclear and pharmaceutical offerings. The strength of the segment should boost its performance in the days to come.

Image source: Zacks Investment Research

In September, Cardinal Health’s wholly owned subsidiary, Cardinal Health Canada, announced an Employee Immunization Requirement Policy, part of its ongoing efforts to protect employees, customers and the Canadian healthcare system from the COVID-19. Based on recent and pending provincial government guidelines and customer protocols in Canada, Cardinal Health Canada aims to have all employees vaccinated by January 2022.

According to the Q2 2021 earnings call, the company has strengthened its core medical and pharmaceutical distribution capabilities and product capabilities while continuing to adapt resilient business models for the future. In addition to making strategic investments in its IT infrastructure to improve customer experience and digital capabilities, the company has invested in its differentiated portfolio to drive long-term strategic growth in key areas, which can provide support and meet the needs of its customers.

What is weighing on the stock?

In the first quarter of fiscal 2022, gross margin fell 4.3% year-on-year to $ 1.64 billion. As a percentage of revenue, gross margin in the quarter presented was 3.7%, down 70 basis points (bps) year over year.

Medical segment profit fell 46% to $ 123 million, on higher supply chain costs. In addition, the improvement in the profit of the Pharmaceuticals segment was largely offset by investments in technological improvements.

Trend in estimates

For fiscal 2022, Zacks’ consensus estimate for revenue is set at $ 176.35 billion, indicating an 8.5% improvement over the number reported the previous year.

The same for adjusted earnings per share stands at $ 5.70, which suggests a growth of 2.3% from the figure released a year ago.

Actions to consider

Some better ranked actions in the broader medical space include Thermo Fisher Scientific Inc. (TMO Free report), Abiomed, Inc. (ABMD Free report) and Corporation of America Holdings Laboratory (LH Free report).

Thermo Fisher has beaten earnings estimates in each of the past four quarters, with an average surprise of 9.02%. The company currently has a Zacks rank of 2 (Buy). You can see The full list of Zacks # 1 Rank (Strong Buy) stocks today here.

Thermo Fisher’s long-term profit growth rate is estimated at 14%. The company’s profit return of 3.7% compares favorably with that of the industry (3.6%).

Abiomed has beaten earnings estimates in each of the past four quarters, with an average surprise of 5.8%. The company currently carries a Zacks Rank # 2.

Abiomed’s long-term profit growth rate is estimated at 20%. The corporate profit return of 1.2% compares favorably with that of the industry (3.6%).

Laboratory Corporation has beaten profit estimates in each of the past four quarters, with an average surprise of 25.7%. The company currently carries a Zacks Rank # 2.

Laboratory Corporation’s long-term profit growth rate is estimated at 10.6%. The company’s earnings return of 9.4% compares favorably with the industry’s 3.4%.