Medline

Medline delivered 12% and 13% revenue and adjusted EBITDA growth, respectively, during the second quarter. Outlook for organic sales growth was raised by 50 basis points but fell 70 basis points for adjusted EBITDA margin. Shares fell 13% on Aug. 5.

Why it matters: Sales continued to track nicely, and the supply chain solutions had a particularly strong quarter with sales up 16% thanks to new signings and customer penetration. That said, margin softness was yet again the main focus of the call, and the near-term picture looks worse now compared with the start of the year. A fire at Medline's Tracy, California, facility in June resulted in a $336 million operating expense, while elevated costs related to the Middle East conflict also weighed on profitability. Although its adjusted EBITDA margin increased 20 basis points year over year, this was purely driven by a tariff refund; excluding that benefit, we estimate underlying EBITDA margin was closer to 10.6%, or down roughly 300 basis points. Management noted that the Tracy fire and Middle East-related costs accounted for about a quarter of the guidance reduction, with the remainder driven by elevated operating costs and retail softness. We think this suggests a meaningful portion of the margin pressure will persist, and combined with several simultaneous headwinds, investors remain without a clean earnings trajectory, contributing to the negative market reaction.

The bottom line: We are reducing our fair value estimate to $43 per share from $48 after baking in the updated guidance and lowering near-term margin assumptions. That said, the selloff looks overblown, and we think patient investors who can overlook some near-term volatility could enjoy moderate upside. Medline's growth story still remains intact. New customers for the year already make up $650 million of signings, and the continuation of this trend would make 2026 the second consecutive year of beating the $1 billion of annual new signings target.

We are reducing our fair value estimate to $43 per share from $48 after baking in the updated guidance and lowering near-term margin assumptions. Our valution reflects 17.5x EV/2026 adjusted EBITDA.

For fiscal 2026, we model 9.5% revenue growth from a mix of 6.0% Medline brand growth and 12.5% supply chain solutions growth. The firm had $2.3 billion in new customer signings during 2025, well ahead of its long-term target, and we expect a healthy level of brand conversion to Medline products throughout 2026 as these customers consolidate their med-surg distribution. We also think solid healthcare utilization will continue to drive end-market growth and Medline will benefit nicely as demand across its portfolio rises.

We model a higher adjusted EBITDA margin purely to account for tariff refunds; management expects the net benefit for the full year to be around $420 million. Excluding this impact, we think the base business margin will see headwinds from ongoing customer conversion efforts, elevated input costs from the Middle East conflicts, and expenses related to a facility fire. New prime vendor wins typically carry lower gross margins at inception, largely due to lower average selling prices across many Medline-branded products. As a result, we expect customer conversion to create additional near-term margin pressure.

Over the long term, we model 6.5% revenue growth and gradual margin expansion throughout our five-year forecast period. Macro secular trends like an aging population, increased healthcare expenditures, and rising prevalence of nonacute facilities should underpin the med-surg industry to grow at a mid-single-digit rate. We think Medline can outpace the market and gain share because it is well positioned across large integrated delivery networks as well as nonacute sites and has made efforts to expand its presence among fast-growing sectors like ambulatory surgery centers and home health facilities. Surgery volume in the US is poised to continue growing nicely, and we see demand for med-surg products to rise accordingly. We expect adjusted EBITDA margin to expand and reach above 12% by 2030. While initial customer conversions pressure gross margins, prime vendor contracts tend to improve profitability over time as Medline captures operating efficiencies through scale, logistics optimization, and vertical integration.

We assign Medline a narrow Morningstar economic moat rating because we believe the firm enjoys high switching costs that help generate excess returns above the weighted average cost of capital for at least the next 10 years.

Switching costs are particularly evident in Medline’s prime vendor relationships. In these relationships, Medline enters into long-term agreements (typically five years) to act as the primary consolidated logistics partner for medical-surgical product needs. This allows customers to consolidate med-surg purchases into a single source, capturing cost savings through volume discounts and operational efficiencies like inventory centralization and distribution integration. For Medline, this provides a predictable, resilient revenue stream. As of year-end 2024, Medline maintained over 1,300 prime vendor relationships, generating $16 billion in revenue—approximately 63% of total sales.

While initial contracts are only five years, customer loyalty is high, evidenced by a 98%-plus retention rate since 2020. Relationships also deepen over time through increased Medline-brand penetration. While Medline-branded products typically make up only a low-teens percentage of a customer's inventory at the start of a partnership, that figure typically climbs to 30%-40% by year 10. We believe the increasing adoption of Medline brands strengthens the mutual operational understanding between Medline and its customers, adding a layer of stickiness to their relationships. With the brand mix sitting at 35/65 (Medline versus national brands) at the end of 2025, significant runway remains for brand conversion.

Beyond initial agreements, many customers expand their partnerships from acute care into laboratories, outpatient, and post-acute facilities. We believe these multiyear, multisetting commitments demonstrate significant operational stickiness and expect this cross-segment expansion to be a key driver of future growth.

We think switching costs are lower for nonprime vendor relationship customers but still see signs of customer stickiness in those partnerships. Many items in Medline’s med-surg portfolio are highly commoditized, meaning customers could likely find a similar product from a competitor. Large GPOs have relationships with several med-surg providers/distributors, so multisourcing and individual product switches are common. That said, we think there are mild administrative switching costs between Medline and nonprime vendor customers, like understanding of needs, inventory management, and minor clinician preferences, that can sway purchasing patterns toward Medline over a competitor. Medline has over 2,300 dedicated sales representatives working directly with hospitals, doctors, and GPOs, roughly 1,000 more than McKesson and Cardinal and even more compared with smaller peers. This level of presence in the marketplace aids in understanding customer needs and improves distributor-customer relationships, ultimately leading to better customer retention and higher switching costs.

Medline’s unrivaled scale in medical-surgical manufacturing and distribution enables the firm to enjoy long-term secular trends like an aging population and increased prevalence of chronic conditions.

Medline’s vertical integration leads to significant operational leverage and efficiency, leading to margin expansion.

The prime vendor model is a key competitive advantage for Medline. Winning new contracts affords Medline further opportunities in wallet penetration, share gains, and ultimately durable long-term revenue generation.

Continued consolidation in the healthcare sector affords more buying power to large hospitals and GPOs and could lead to Medline conceding price and contracting margins.

The regulatory framework around healthcare and insurance can be dynamic. Any downward risks in healthcare utilization could curb spending from Medline’s key customers, threatening Medline’s growth.

After decades of operating as a private entity, a transformation into a public company could come with increased operational pressures and additional capital allocation priorities.