Cardinal Health on Tuesday showed why the healthcare distributor belongs in our portfolio, delivering robust full-year earnings guidance that trumped some imperfections in the final quarter of its fiscal 2026. Revenue for the three months ending June 30 increased nearly 6% year over year to $63.67 billion, missing expectations of $65.03 billion, according to LSEG. Adjusted earnings per share (EPS) came in at $2.60, ahead of the $2.42 consensus estimate compiled by LSEG. The 18-cent earnings beat excludes a 31-cent per share benefit from tariff refunds paid by the U.S. government. Shares of Cardinal Health rose more than 1% Tuesday, setting a fresh record close. Its all-time closing high of $239.71 was set on July 7. Cardinal’s stock had spiked earlier in Tuesday’s session, reaching as high as $258.30, before the gains faded. We’re chalking that retreat up to nothing more than profit-taking, considering those levels represented all-time intraday highs. Cardinal’s previous intraday peak came on Aug. 6, at $244.01 a share. Its all-time closing high of $239.71 was set further back on July 7. While we understand the desire to book profits at record levels, we still like the stock because the profit growth is there. Not only did Cardinal’s earnings grow nicely in the reported fourth quarter, but its EPS outlook for fiscal 2027 implies growth above its long-term guidance range. CAH YTD mountain Cardinal’s year-to-date stock performance. Bottom line This was not the cleanest quarter, evidenced by the revenue miss. Nevertheless, the results and guidance demonstrated Cardinal’s enhanced profitability as the company pushes into high-margin areas like specialty pharmaceuticals, direct-to-patient delivery of healthcare supplies, and owning the business side of specialty medical practices. There’s a lot more to Cardinal Health these days than its legacy business distributing drugs and medical supplies to hospitals and retail pharmacies — though that part of the company is still important to the financials. While the headline numbers had some benefit from tariff refunds — thanks to the Supreme Court overturning the Trump administration’s “liberation day” duties — a quick look under the hood makes clear that strong execution and increased operating efficiency are what really drove Cardinal’s quarter. Rather than dwell on the top-line miss, we’re instead focusing on the company’s ability to generate strong free cash flow and deliver materially better-than-expected profits in spite of the revenue headwinds. This is true in both the June quarter and the outlook for fiscal 2027, which started last month. The results in the company’s largest segment, Pharmaceutical and Specialty Solutions — where we find U.S. pharmaceutical and consumer products distribution results — showed the benefit of Cardinal Health’s volume-based, fee-for-service operating model for branded drug distribution. This allowed the company to turn in better-than-expected profits despite a revenue headwind resulting from regulatory changes in the U.S. pressuring drug prices. While Global Medical Products and Distribution — which includes the results of Cardinal Health’s brand of medical, surgical, and laboratory products — benefited from the tariff refunds, profitability was still stronger than expected excluding the benefit. Meanwhile, sales and segment profit results in “Other” — the company’s fastest-growing unit made up of several businesses currently too small to justify their own segments — missed expectations. However, we were pleased to see the segment margin expand to a level above what the Street was looking for. Leveraging a slower-growing top line into a much-faster-growing bottom line is a key reason to own the stock. Ultimately, what investors care about at the end of the day is earnings growth, and Cardinal continues to check that box. Plus, Cardinal offers us some nice diversification away from technology, complementing our exposure to drugmakers Johnson & Johnson and Eli Lilly within the healthcare industry. Against this backdrop, we’re raising our price target to $265 from $245, while maintaining our hold-equivalent 2 rating for now. With the stock having worked back to near-record levels ahead of Tuesday’s release, we’ll look for a better opportunity to upgrade the name. Commentary In the Pharmaceutical and Specialty Solutions segment — by far its largest by sales — revenue increased 6% year over year to $58.85 billion, short versus expectations. Revenue growth was driven by brand and specialty pharmaceutical sales from existing customers, while segment profit performance benefited from strength in brand and specialty products and positive performance in the generics program. While generic drugs sell at a lower price, they have a better profit margin for Cardinal Health. This segment is home to Cardinal’s bread-and-butter drug distribution business, which consists of both branded and generic medicines. The distribution of specialty pharmaceuticals — think treatments for cancer, as well as urological, kidney and autoimmune diseases — is one of the more important growth stories for this segment. Sales of Cardinal’s consumer healthcare products, such as crutches, canes and its Leader brand of cough drops and other over-the-counter medications, are also reported here. Additional operations housed within the segment include pharmacy management services for hospitals, and the ownership of managed services organizations (MSOs), which is a fancy term for owning the business side of medical practices. Cardinal has made a couple of acquisitions in recent years to build up its MSO presence, which is one of those higher-margin endeavors that excites investors. On the post-earnings call with investors, CFO Aaron Alt once again highlighted growth of GLP-1 drugs showing in the segment’s revenue. However, as we saw in the March quarter, Cardinal’s top-line performance was hurt by lower drug prices resulting from Medicare negotiations. Authorized by the passage of the Inflation Reduction Act (IRA) in 2022, the lower negotiated prices for certain drugs took effect at the start of 2026. These efforts to cap the wholesale acquisition cost (WAC) of the drugs counteracted the GLP-1 tailwind, resulting in a net-neutral top-line impact for Cardinal Health in the June quarter. The upshot, though, is that Cardinal operates on a fee-for-service model that relies on volume — taking a small fee for every unit moved. As a result, segment profits get to benefit from the volume growth, while being largely insulated from the price caps. That said, as contracts come up for renegotiation, the lower WAC for drugs subject to Medicare negotiations could impact future profits as drugmakers look to reduce costs in the face of price caps. This isn’t a new debate, given the IRA was passed a few years ago and the industry and investors have been preparing for it. Cardinal’s argument in the past has been that the company clearly provides a valuable service to the drugmakers, or else they wouldn’t be leaning on the company for distribution. The value of that service, the company argues, doesn’t change despite lower WAC. CEO Jason Hollar echoed that commentary this time around, saying “we feel very, very good about our role to safely, securely and efficiently deliver these life’s necessary products to patients. So we don’t see our role changing, and we don’t believe our compensation should change as a result of our role remaining the same.” In Global Medical Products and Distribution, revenue was down slightly to $3.13 billion, impacted in part by the recognition of tariff refund repayments. The $150 million in segment profit (in the chart above) includes a $100 million benefit from the refunds. However, even excluding that benefit, the $50 million normalized number still looks good versus expectations. This segment reports on the manufacture, sourcing, and distribution of Cardinal Health brand medical, surgical, and laboratory products. Operations span the U.S., Canada, Europe, Asia, and other markets. It also includes revenue from the distribution of medical, surgical, and laboratory products to hospitals, ambulatory surgery centers, clinical laboratories, and other healthcare providers in the U.S. and Canada. In the Other segment, which includes Nuclear and Precision Health Solutions (NPHS), at-Home Solutions, and OptiFreight Logistics, revenue increased 7% year over year to $1.72 billion. This was a bit short versus Wall Street expectations. Though this is the smallest of the three operating segments, it has the fastest top-line growth by far and punches way above its weight from a profitability perspective, with its 10.6% segment profit margin (the other two segments’ margins are in the 1% range). That’s what makes Other so important to investors as it continues to scale up. Revenue growth was realized in all three Other operating units, while segment profit growth was driven by at-Home Solutions and OptiFreight Logistics. Nuclear and Precision Health Solutions operates nuclear pharmacies and manufacturing facilities, including for radiopharmaceuticals used in PET scans. At-Home Solutions consists of Edgepark (including Advanced Diabetes Supply Group) and at-Home. The former directly provides medical supplies to patients with chronic conditions in their homes, while the latter is a business-to-business distribution service that provides medical supplies and over-the-counter products. Last month, Cardinal made two more acquisitions to bolster its direct-to-patient business. OptiFreight Logistics provides shipping and logistics support to health-care providers. Customers include hospitals, pharmacies, labs, and surgery centers. Guidance For the full fiscal 2027, Cardinal is guiding to adjusted earnings growth of 13% to 15%, which puts us in a range of $12.40 to $12.60. That’s well ahead of the $12.04 per share the Street was looking for, according to LSEG. Driving the forecast, the team expects: Pharmaceutical and Specialty Solutions segment revenue to increase 3% to 5%, with 8% to 11% growth in segment profit. Global Medical Products and Distribution segment revenue to increase 2% to 4%, with $200 to $220 million in segment profit. Other segment revenue to increase 11% to 13%, with 15% to 18% growth in segment profit. Free cash flow is expected to be between $3.5 billion and $4 billion, ahead of the $3.49 billion FactSet consensus estimate. (Jim Cramer’s Charitable Trust is long CAH, JNJ and LLY. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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