EC Is Cardinal Health A Better Bargain Than Ever?

The S&P 500 is trading at a historically expensive valuation, propped up by low interest rates, quantitative easing, and positive investor sentiment. This has made it difficult to find bargains in today’s stock market.

One of the best ways to identify value is by looking for companies experiencing short-term trouble.

Cardinal Health (CAH) is an example of this right now – the stock has dropped more than 10% in today’s trading.

Cardinal Health Year-To-Date Stock Price

Source: Yahoo! Finance

Cardinal’s stock price is a result of lowered guidance for fiscal 2017 after the announcement of a $6.1 billion acquisition of Medtronic’s (MDT) Patient Care, Deep Vein Thrombosis and Nutritional Insufficiency businesses.

Despite the company’s lowered guidance, it is still a high-quality business and makes an attractive investment at today’s price. The company is also a consistent dividend raiser, increasing its annual payout for 39 consecutive years. 2017 will likely mark the company’s 40th consecutive annual increase.

Cardinal Health is more than qualified to be a member of the Dividend Aristocrats – a group of companies with 25+ years of consecutive annual dividend increases.

Cardinal Health presents compelling value right now. This article will analyze the price decline and investment prospects of Cardinal Health in detail.

Why the Price Decline?

Cardinal Health announced this morning that the company was acquiring three Medtronic businesses for a total of $6.1 billion. Given that Cardinal Health currently has a market capitalization of ~$23 billion, this is a substantial acquisition for the company.

Despite the size of the transaction, Cardinal Health is not diluting its existing shareholders. The company is funding the purchase with a combination of unsecured notes and existing cash & equivalents. This acquisition is expected to be accretive to the company’s earnings-per-share immediately.

The acquisition itself is not the reason for Cardinal Health’s stock price decline. In a separate press release, the company updated its guidance for fiscal 2017 (which is well underway for Cardinal Health, with the company set to report third quarter earnings on May 1st).

Previously, the company had forecasted adjusted earnings-per-share of $5.35-$5.50 for fiscal 2017. Now, the company expects the coming year’s earnings to be “at the bottom of its previous guidance range of $5.35 to $5.50”. Cardinal Health also stated that their “preliminary fiscal 2018 view is for Non-GAAP EPS to be flat to down mid-single digits”.

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Gary Tanashian 1 month ago Contributor's comment

Very helpful article, given my interest in the medical device market.