Cencora's Q2 Surge: U.S. Dominance Masks International Headwinds

Cencora, Inc. delivered a robust fiscal 2025 second quarter, driven by double-digit revenue growth in its U.S. Healthcare Solutions segment and a sharp decline in litigation-related expenses. However, challenges in international markets and rising debt underscore the need for cautious optimism. Here’s a deep dive into the numbers and their implications for investors.

Financial Highlights: U.S. Momentum vs. Global Struggles

Cencora’s total revenue rose 10.3% year-over-year to $75.5 billion, with the U.S. Healthcare Solutions segment leading the charge. Revenue here surged 11.4% to $68.3 billion, fueled by strong demand for GLP-1 therapies (e.g., diabetes/weight loss drugs) and the January 2025 acquisition of Retina Consultants of America (RCA). Operating income in this segment jumped 22.8% to $1.0 billion, highlighting operational efficiencies and synergies from the RCA deal.

Meanwhile, the International Healthcare Solutions segment posted a 0.7% revenue increase to $7.2 billion, but this masks deeper issues. On a constant currency basis, revenue fell 4.0%, reflecting struggles in European logistics and specialty products. Operating income here dropped 17.3% to $159.3 million, with constant currency performance down 13.9%.

Profitability: Litigation Relief and Margin Gains

The company’s adjusted diluted EPS rose 16.3% to $4.42, while GAAP EPS surged 76.1% to $3.68. The sharp jump in GAAP EPS was partly due to a $214 million litigation accrual in the prior-year quarter tied to opioid liabilities. Current litigation costs dropped to just $11.5 million, a stark improvement.

Gross profit grew 20.6% under GAAP to $3.1 billion, aided by higher U.S. margins (+35 basis points to 4.06%) and gains from antitrust settlements. However, LIFO (last-in, first-out) expenses of $39.5 million and currency-related remeasurement costs (e.g., $14.5 million in Turkey) tempered adjusted gross profit growth to 15.2%.

Debt and Risks: The RCA Acquisition’s Double-Edged Sword

The RCA acquisition added $3.3 billion in debt ($1.8 billion senior notes and $1.5 billion term loan), pushing net interest expenses up 62.2% to $104 million. While the deal bolstered U.S. revenue and margins, integration costs and fair value adjustments (totaling $37.5 million) weighed on operating expenses.

The noncontrolling interest in RCA—15% treated as a contingent liability—avoids diluting EPS but adds complexity. Meanwhile, the effective tax rate jumped to 22.7% due to the prior-year’s foreign tax benefits, squeezing profits.

Guidance: U.S. Optimism vs. International Caution

Cencora raised its full-year adjusted EPS guidance to $15.70–$15.95 (up from $15.30–$15.60), reflecting U.S. momentum. The U.S. Healthcare Solutions segment’s operating income growth forecast was increased to 17.5–19.5%, while International guidance was slashed: revenue growth revised down to 3–4% (vs. prior 4–5%), and operating income now expected to decline 1–4%.

Conclusion: A Two-Speed Story, But U.S. Is the Engine

Cencora’s Q2 results reveal a company thriving in its core U.S. market but grappling with international headwinds. The RCA acquisition and strong GLP-1 demand are clear positives, supported by:
- Revenue diversification: U.S. now accounts for 90% of total revenue, reducing reliance on volatile international markets.
- Margin expansion: Adjusted operating margins improved to 1.58%, with U.S. margins leading the way.
- Balance sheet management: Despite debt, share repurchases cut diluted shares by 3.0%, boosting EPS.

However, risks remain:
- Debt servicing: Rising interest expenses could pressure future cash flows.
- Currency exposure: The International segment’s constant currency decline highlights vulnerability to foreign exchange swings.
- Regulatory and litigation risks: While current litigation costs are lower, past issues loom.

For investors, the stock’s performance—likely to reflect this two-speed dynamic—should be monitored closely. The U.S. healthcare tailwinds are undeniable, but Cencora’s ability to stabilize its international business and manage debt will determine long-term sustainability. At current valuations, the stock merits a hold rating unless international performance rebounds sharply.

In the end, Cencora’s story is one of strategic focus: doubling down on its U.S. healthcare dominance while navigating a challenging global landscape. The question remains whether the U.S. engine can offset the international drag indefinitely.