Stock Analysis & Ideas

CAH vs. MCK: These Healthcare Stocks are Hot and Can Stay Hot

Story Highlights

While the healthcare sector has held up much better than the rest of the market in 2022, a select few names within healthcare have done smashingly well. With Cardinal Health and McKesson both up substantially year-to-date, investors might be wondering whether more upside is possible.

The healthcare sector has held up much better than the overall market, as the S&P 500 Healthcare Sector Index is roughly flat year to date. However, some healthcare stocks have massively outperformed the rest of the sector. In this piece, we compare two healthcare services stocks, CAH and MCK, that have been killing it this year. Year-to-date, Cardinal Health (NYSE: CAH) and McKesson (NYSE: MCK) are up 47% and 60%, respectively. These companies share similarities. Both companies distribute pharmaceuticals and provide health information technology and medical supplies and equipment, and they both appear undervalued.

Cardinal Health (CAH)

With $181.4 billion in revenue for the fiscal year that ended in June 2022, Cardinal Health is a powerhouse in the healthcare services space. Unfortunately, the company’s profitability leaves much to be desired, and its balance sheet is mediocre. However, it trades at a discount to its sector, and activist involvement could unlock shareholder value. Thus, a bullish view appears appropriate.

Cardinal’s balance sheet de-risks the business with $43.9 billion in assets and $44.6 billion in liabilities. However, despite all that revenue, Cardinal was in the red for Fiscal 2022. The company currently trades at a forward (next 12 months) P/E ratio of around 14.5x and a forward P/S ratio of around 0.1x.

The healthcare sector as a whole has a median forward P/E ratio of around 18.9x and a median P/S ratio of about 4.3x.

Based on both these multiples, Cardinal Health looks undervalued relative to its peers. However, it should be noted that the average three-year earnings growth in the healthcare sector has been 17% per year, but Cardinal has come up far short of that, even reporting a loss in Fiscal 2022.

The good news for Cardinal Health is that activist firm Elliott Management established a sizable position in August. The reported board shake-up and new chief executive officer offer the greatest hope for value-unlocking change at Cardinal, warranting a bullish rating when paired with its low multiples. The new CEO could also help correct the many execution missteps the company has made in recent years.

What is the Price Target for CAH stock?

Cardinal Health has a Hold consensus rating based on two Buys, seven Holds, and one Sell rating assigned over the last three months. At $70.70, the average price target for Cardinal Health implies downside potential of 6.6%.

McKesson (MCK)

Like Cardinal, McKesson is another powerhouse in the healthcare industry, with $272 billion in revenue for the 12 months ended September 2022. Also, like Cardinal, McKesson trades at a discount to the healthcare sector. The company’s solid track record of revenue and earnings beats and its satisfactory balance sheet make a bullish view look appropriate.

McKesson’s balance sheet shows $63.3 billion in assets and $65.1 billion in liabilities, so the company is in roughly the same cash position as Cardinal. It also struggled during the pandemic, losing $4.5 billion in the fiscal year that ended in March 2021. However, McKesson has a far more solid track record of profitability than Cardinal, making it look more attractive.

The company trades at a forward P/E ratio of around 15.8x times and a forward P/S ratio of around 0.2x, making it significantly undervalued relative to the rest of the healthcare sector but in line with Cardinal Health. Unfortunately, McKesson doesn’t have the value creation expectations that Cardinal does due to its activist involvement.

However, McKesson’s business looks more stable from a fundamental standpoint, and it’s already taking steps to streamline its business, like exiting its European businesses to turn its attention to its high-margin businesses. Also, Warren Buffett‘s Berkshire Hathaway owns McKesson, establishing the position earlier this year.

What is the Price Target for MCK stock?

McKesson has a Strong Buy consensus rating based on nine Buys, one Hold, and zero Sell ratings assigned over the last three months. At $422.60, the average price target for McKesson implies upside potential of 6.3%.

Conclusion: Bullish on MCK and CAH Shares

Finally, here’s another similarity that makes both companies look attractive. McKesson and Cardinal Health are both dividend stocks, although Cardinal’s yield is much higher at 2.6% versus McKesson’s 0.57% yield. Ultimately, both Cardinal Health and McKesson look like solid plays right now, but there’s a caveat. Both could take a while to play out due to the challenging market conditions. However, with Elliott’s involvement in Cardinal and Buffett’s vote of confidence in McKesson, both seem relatively safe compared to the rest of the market and healthcare sector.


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