Cardinal Health's Strong Q2 and Raised Guidance Amid Persistent Earnings and Risk Concerns

What happened

Cardinal Health reported second-quarter fiscal 2026 revenue of $65.6 billion, up 19% year-over-year, with non-GAAP diluted EPS jumping 36% to $2.63, leading the company to raise its full-year non-GAAP EPS guidance to $10.15-$10.35. The company also completed a $750 million share repurchase and announced it has reached its targeted leverage range, highlighting improved cash flow and capital discipline. However, the DeepValue report cautions that earnings quality is increasingly reliant on non-GAAP adjustments, with FY25 GAAP EPS of $6.45 versus non-GAAP $8.24 due to $464 million in acquisition-related amortization and rising interest expense. Despite the guidance raise, underlying structural risks persist, including high customer concentration with CVS accounting for 30% of revenue, potential IRA-driven drug pricing pressures, and integration challenges from recent MSO acquisitions. The stock's valuation at approximately 22 times the raised EPS floor embeds lofty growth expectations, leaving little cushion for any operational or regulatory setbacks.

Implication

The raised EPS guidance to $10.15-$10.35 underscores Cardinal Health's momentum in specialty and MSO platforms, but at current valuations around $214, much of this optimism may already be priced in. Completion of the share repurchase and leverage target achievement signals management's confidence in cash flow, yet rising net debt and interest costs guided toward $325 million annually could constrain future financial flexibility. Persistent gaps between GAAP and non-GAAP earnings, driven by acquisition-related adjustments, raise questions about the sustainability of true economic earnings and cash flow conversion. High customer concentration with CVS and ongoing regulatory threats from IRA drug pricing reforms present asymmetric downside risks that quarterly outperformance does not address. Given the stock's crowded momentum ownership and elevated expectations, any future guidance miss or integration hiccup could trigger significant multiple compression, aligning with the DeepValue report's 'POTENTIAL SELL' rating.

Thesis delta

The Q2 results and guidance raise confirm Cardinal Health's ability to deliver near-term earnings growth, supporting the base case of exceeding $10 EPS in FY26. However, this does not meaningfully shift the core thesis, as concerns about earnings quality from non-GAAP adjustments, rising leverage, customer concentration, and policy risks remain unchanged and may even intensify with higher expectations.