We're adding a stock to our Bullpen watchlist that is resistant to recessions and AI disruption
In the ever-evolving landscape of the stock market, identifying resilient companies is crucial for investors. During our recent Monthly Meeting, we added a notable stock to our Bullpen watchlist—Cardinal Health. This company stands out for its minimal economic sensitivity and its ability to withstand potential disruptions from artificial intelligence (AI).
About Cardinal Health
Cardinal Health is a pivotal player in the U.S. health-care industry, serving as a backbone for the supply chain that delivers essential medicines and medical products. The company specializes in the procurement and distribution of prescription drugs to hospitals, retail pharmacies, and clinics. Additionally, Cardinal Health manufactures and distributes various medical products, including surgical items and examination gloves.
Market Position and Industry Dynamics
The health-care supply chain is characterized by an oligopoly, with Cardinal Health competing alongside two other major players—McKesson and Cencora. This competitive landscape provides Cardinal Health with a unique advantage, allowing it to maintain a strong market position. The company’s operations are not only vital to the health-care system but also exhibit resilience against economic downturns.
Demographic Trends Supporting Growth
One of the most significant long-term tailwinds for Cardinal Health is the aging U.S. population. Over the past three decades, there has been a consistent increase in the number of Americans aged 65 and older. This demographic shift is crucial as older adults are more likely to require multiple pharmaceutical products. Cardinal Health highlights that individuals over 65 have over a 50% chance of taking four or more medications, a stark contrast to those under 50, who face a five-times lower likelihood.
As the population continues to age, Cardinal Health anticipates a steady increase in demand for its services and products, making it an economically resilient stock that is less affected by broader economic fluctuations.
AI Disruption and Market Reactions
With the rise of AI, many companies face potential threats to their business models. However, Cardinal Health appears to be insulated from these risks. Recently, shares of Cardinal Health experienced a sell-off due to concerns over a new logistics tool introduced by a smaller company that aimed to enhance freight efficiency. This led to fears that drug distribution might lose pricing power. However, the market quickly recognized this reaction as overblown, and the stock rebounded.
Analysts at Barclays have suggested that improvements in distribution efficiency could benefit wholesalers like Cardinal Health, allowing them to accrue cost savings that enhance profitability.
Financial Performance and Valuation
Cardinal Health has demonstrated strong financial performance, with its stock gaining approximately 10% year-to-date. Despite this growth, the stock trades at a price-to-earnings (P/E) ratio of just 21 times the estimated earnings for calendar year 2026. While this may seem high compared to its historical averages, it reflects the company’s consistent double-digit percentage growth in earnings per share (EPS).
In comparison to other stocks, Cardinal Health remains competitively priced, particularly against companies like Danaher, from which we recently divested due to disappointing performance.
Conclusion
As a member of the CNBC Investing Club, subscribers receive timely trade alerts before any transactions are made in Jim Cramer’s Charitable Trust portfolio. Jim Cramer ensures a waiting period before executing trades to maintain transparency and fairness. Given the compelling fundamentals and market position of Cardinal Health, it stands as a strong candidate for investors looking for resilience amid economic uncertainty and technological disruption.
Frequently Asked Questions
Cardinal Health primarily focuses on supplying and distributing medicines and medical products to hospitals, retail pharmacies, and clinics, alongside manufacturing surgical products and medical supplies.
The aging U.S. population increases demand for pharmaceutical products and health-care services, benefiting Cardinal Health as older adults are more likely to require multiple medications.
While AI poses risks to many industries, Cardinal Health is considered relatively insulated from these threats, and improvements in distribution efficiency through AI could enhance its profitability.
Note: The information provided in this article is for informational purposes only and should not be considered as financial advice.
