Tags: Cardinal | Health | undervalued | CAH

Cardinal Health an Undervalued Healthcare Play

By    |   Wednesday, 11 Apr 2012 11:10 AM

Cardinal Health (CAH) is a healthcare services provider which operates in two segments, pharmaceutical and medical. The company believes that recent trends in its business point to steady growth. Analysts are nevertheless very bullish on the stock, calling it undervalued at recent prices.

The pharma business distributes branded and generic pharmaceutical, over-the-counter healthcare and consumer products through its pharmaceutical distribution business to retailers, including chain and independent drug stores and pharmacy departments of supermarkets and mass merchandisers, hospitals, and alternate care providers, including mail-order pharmacies.

The segment also operates nuclear pharmacies and cyclotron facilities that prepare and deliver radiopharmaceuticals for use in nuclear imaging and other procedures in hospitals and clinics, and it provides third-party logistics support services.

The medical side distributes medical, surgical and laboratory products, including sterile and non-sterile procedure kits, single-use surgical drapes, gowns and apparel, exam and surgical gloves, and fluid suction and collection systems.

Cardinal Health management told investors at the end of 2011 that generics demand drove growth in the pharma business, and that acquisitions will set the company up for continuing growth. Material costs, due to commodity prices, had hurt the medical supplies side, the company said.

Both of these trends are likely to continue into 2012, managers said. “Within our pharmaceutical segment, we expect branded pharmaceutical price appreciation in fiscal 2012 to be similar to fiscal 2011. We also expect significant new generic pharmaceutical launches in fiscal 2012; however, their impact on our gross margin can vary significantly depending on timing, size, and number of entrants, and may be less in fiscal 2012 than in fiscal 2011,” they reported.

Meanwhile, “in fiscal 2012, we anticipate a negative year-over-year impact from higher commodity prices. In addition, given the current economic and healthcare environments, we expect healthcare utilization, including surgical procedures, to remain somewhat sluggish in fiscal 2012,” managers said.

Cardinal Health is a $14.17 billion market cap company, almost triple the average size of the companies in the healthcare providers and services sector. Its trailing 12-month P/E is 15.01 vs. 17.40 for the sector.

The five-year projected price-to-earnings-growth (PEG) ratio is 1.27 against a sector average of 1.46. Cardinal Health has projected earnings per share growth of 11.6 percent in the coming year, vs. 14.33 percent in its sector.

Multiple buy calls


Analysts are high on Cardinal Health at the moment, granting it multiple buy calls with no negative calls among the major firms. Raymond James rates the stock at outperform, as do the analysts at Standard & Poor’s Equity Research.

“The company has enjoyed a very positive trend in earnings per share over the past five quarters and while recent estimates for the company have been mixed, CAH has posted better than expected results,” say the analysts at Ford Equity Research, who offer a strong buy rating.

“Based on operating earnings yield, the company is undervalued when compared to all of the companies we cover. Share price changes over the past year indicate that CAH will perform well over the near term.”

Cardinal Health next reports on May 3.

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2012-10-11
Wednesday, 11 Apr 2012 11:10 AM
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