Category Archives: Cardinal Health

Cardinal Health 10-Year Targets

Below are the valuation targets for Cardinal Health (CAH) for the next 10 years. Continue reading

Quick Take: Cardinal Health

On May 3, 2018, it was reported that Cardinal Health (CAH) declined –21% due to:

“…the company's loss of a contract with PharMerica and lower drug prices are responsible for the bearish outlook (TheStreet.com).”

The impact of these issues has resulted in lower 2019 earnings estimates for CAH.  Below are some thoughts on our expectations for CAH in the coming year.

Sell Cardinal Health (CAH) at the Market

Since our write-up on Cardinal Health (CAH) on September 29, 2009 the stock has appreciated 23%. Purchasing the stock on 9/30/09 for $26.80 and selling it on 2/23/10 for $33 would yield an annualized return of 57%. This exclude two dividend payments.

Let's review the numbers. The table below shows the previous article's fundamentals compared to today's figures.

Date P/B F P/E P/CF Yield
9/29/2009 1.11 12.00 6.00 2.60%
2/23/2010 2.33 13.81 8.70 2.10%

As you can see, the valuation improved quite a bit given that nothing substantially materialized other than the company raising the profit outlook. Looking at the figures above, you can see that the price-to-book (P/B) ratio has more than doubled. This occurred because of the 2nd quarter results. Because of the recent changes, CAH is no longer the bargain we saw back in September 2009 when it was trading as if they didn't have any intangible assets. Remember, I stated that "given that all CAH competitors (ABC, MCK, and OMI) are trading at more than 2.3x book value, CAH is deeply discounted at 1.1." Now that CAH appears to be fully valued, I have to urge investors to search for safer alternatives.
A 23% profit may not seem like much, however it is a big accomplishment given the stock was held for nearly 5 months. Remember, we are only interested in "seeking fair profits". We at New Low Observer, feel that the risk/reward is no longer in our favor and we would rather take 23% in 147 days.
Investment Observations are intended to be a starting point for investigating a quality company at a reasonable price. It is hoped that after doing the background research, you can buy the stock at a lower price. Ideally the stock should be held in a tax deferred account and should not consist of less than 20% of your holdings. Personally, we prefer holding only 2-3 stocks at a time.

Sell recommendations are intended to deal with the short term reality of the market. The tracking of the Sell recommendations are the worst case scenario if you happen to have bought a stock at the time the Investment Observation was made (please avoid making this mistake.) We aim for mediocrity in our returns, therefore we are happy with 9-12% annual gains. However, since codifying this approach to investing in 2005, we have had annual returns of 20% and above every year since.

It is always recommended that when selling a stock, one should not place stop orders, limit orders or orders after hours. This leaves the seller in the position of being vulnerable to the whims of the market makers. Instead, place your sell orders only as a market order during market hours. Some would complain that a market order during market hours might leave some profits on the table. However, we would rather leave some money on the table rather than have it taken away from us by the trades that are placed by institutions and market makers.

- Art

Stock to Watch: Cardinal Health (CAH)

Cardinal Health (CAH) is one of the leading wholesale distributors of pharmaceuticals, medical/surgical supplies, and related products to a broad range of health care customers. The company completed a unit spin-off, CareFusion (CFN), on 9/1/09. Any investors with shares of CAH at the end of August received 0.5 shares of CFN. As a result, CAH price was adjusted down to $25.11 on 9/1/09 from $34.58 on the previous day. Two weeks later, Goldman Sachs upgraded CAH to a "buy" rating from "neutral" with a target price of $31. The stock closed at $27.29 on that day.
I pitched Cardinal Health to my readers several times prior to this writing. The first was a simple technical look at this stock on 6/11, 7/11, and 8/20. What I saw then was a stock with great fundamental developing a strong technical pattern called "triple bottom". Today I pitch you Cardinal Health once again with the different view. If you purchased this stock without selling them as I did, you would have done very well. As an added bonus, you would've gained some shares of CareFusion which rose 10.5% since it began trading. So let's dig into the number.
Cardinal Health came back on my radar on 9/18 watch list as because it appeared to be within 20% from the yearly low. A closer look at CAH shows a revealing valuation proposition. CAH is currently trading at 1.11x book value, 12x Forward P/E, 6x Cash, and 2.6% dividend yield. The undervaluation appeared to be because of the split but CFN is also trading at a discount value when you see it is trading at 0.88x book value. CAH is estimated to grow 8.4% (based on low estimate) and with yield of 2.6% that is a good 11% return. The great thing is the top line revenue is expected to stay relatively flat which mean they will be more efficient.
Using dividend as an insurance against price decline, investors will be rewarded with $0.70 per shares or 2.6% yearly. With low earning estimate of $1.89 for 2010, the payout ratio is 37%. Taking the previous year dividend increase rate, I project that CAH will raise payout to $0.74 for 2011. Low end estimate is projected at $2.05 which brings payout ratio down to 36%.
My model shows CAH should be at $40 range but this is based on previous year results including figures from CFN.  Surely I could be wrong and price fall, but as a value investor, I will not get many chances to buy a medical company at or near its book value. Given that all CAH competitors (ABC, MCK, and OMI) are trading at more than 2.3x book value, CAH is deeply discounted at 1.1. My estimate shows any 1.95x book to be low end of CAH and that would bring share price to $47. A 74% gain! That is just crazy. I will probably re-buy this stock in the days ahead.
Art

Disclosure: All figures are from Yahoo! Finance as of 9/29/09

Sell Cardinal Health (CAH) at the Market

It is now time to recommend that Cardinal Health (CAH) be sold at the market. The stock has performed reasonably since the research recommendation was issued on June 4, 2009. It is highly recommended that anyone who bought the stock based on my research should re-read the posting. The stock took a small dip in the early part of July, but changed direction after July 10th and hasn't looked back. From the current level, CAH is poised to reach the $43 level considering that we just got a Dow Theory cyclical bull market signal (within a larger secular bear market.) In the pursuit of "seeking fair profits" the returns that this stock has provided within the last fifty-four (54) days say that it is worthwhile considering alternative opportunities.
CAH was recommended when it was trading at $29.95. As of July 28, 2009, CAH was quoted at $33.03. This equals a return of 10.28% in less than 2 months. Conservatively, on an annualized basis this would equal approximately 61% return. Selling this stock now also generates a return 228% greater than the amount of the dividend yield if the stock was held for a whole year.

It is always recommended that when selling a stock, one should not place an order after hours or when the market is closed. This leaves the seller in the position of being vulnerable to the whims of the market makers. Instead, place your sell orders only as a market order during market hours. Some would complain that a market order during market hours might leave some profits on the table. However, I would rather leave some money on the table rather than have it taken away from me by the trades that are placed by institutions and market makers. Touc.


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