Cardinal Health, Inc. (CAH): Despite a Big Contract Loss, This Healthcare Service Company is a Buy

Page 1 of 2

In the first quarter of 2013, many famous investors either exited or reduced their positions in Cardinal Health, Inc. (NYSE:CAH). While Larry Robbins, Scott Black and Jim Simons sold out their positions, Joel Greenblatt and Paul Tudor Jones reduced their exposures to this stock. Indeed, Cardinal has recently lost several big contracts, implying declining sales over the next year.

Used to rely on two major customers

Cardinal Health, Inc.Cardinal Health, Inc. (NYSE:CAH) had two major customers, CVS Caremark Corporation (NYSE:CVS) and Walgreen Company (NYSE:WAG). With total 2012 revenue of $107.5 billion, CVS Caremark accounted for 22% of Cardinal’s total revenue, while Walgreen represented as much as 21% of its total sales. The two contracts with those two biggest customers will expire soon, in June 2013 for CVS Caremark and in August 2013 for Walgreen. The positive note for Cardinal Health, Inc. (NYSE:CAH) is the contract renewal with CVS Caremark Corporation (NYSE:CVS), securing more than $20 billion in revenue for the company. The contract will be valid until the middle of 2016. However, it did not get lucky with Walgreen. In 2012, Cardinal Health let its competitor AmerisourceBergen Corp. (NYSE:ABC) took away $9 billion annual revenue from drug benefits manager Express Scripts.

AmerisourceBergen took away the Walgreen contract

Many investors also worry about the recent lost of contract with its second biggest customer, Walgreen. Walgreen Company (NYSE:WAG) announced in March that it would not renew its contract with Cardinal Health, Inc. (NYSE:CAH), but rather be pursuing a 10-year agreement with AmerisourceBergen for daily drug distribution to Walgreens’ retail stores and specialty pharmacies. Moreover, Walgreen and its partner Alliance Boots also have the right to acquire up to 23% of AmerisourceBergen, including 7% open market purchase and 16% in warrants. This vertical integration will help all parties involved to increase operating efficiency, lower costs and gain bargaining power in the pharmaceutical industry. AmerisourceBergen Corp. (NYSE:ABC) is trading at $55.90 per share, with a total market cap of $12.9 billion. The market values the company at 9 times its trailing EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization).

The positive effect of the contract loss

Nevertheless, the loss of the contract with Walgreen has some positive effects on Cardinal Health, Inc. (NYSE:CAH)’s business. It expected lower working capital needs, thanks to the decreased inventory and accounts receivable when the Walgreen contract expires. In its Q3 2013 conference call, the company estimated that it could generate over $500 million in extra cash due to the reduced working capital, loss after-tax earnings and other cash tax impacts. Moreover, according to Barron’s, J.P Morgan thought that Cardinal Health could experience growth in its distribution margin, from 1.6% to more than 2% next year, because the contract losses mean putting an end to the low-margin businesses. EPS might experience a small decline in the next year, and then after that the business could have double-digit growth. Cardinal Health, Inc. (NYSE:CAH) is trading for lower valuation than AmerisourceBergen. At $48.80 per share, it is worth $16.70 billion on the market. The market values Cardinal Health at more than 7.5 times trailing EBITDA.

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The Highest Grossing Musicals on Broadway

The Most Successful Reality TV Stars

Cheapest Cities to Visit in the US

Most Expensive Summer Camps

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations in the World

Top 10 Highest Paying Jobs in the World

Most Expensive Day-Care in New York City

The 10 Cheapest Places to Retire Abroad

Top 10 Most Expensive Luxury Cars in the World – 2014

Killer Small Business Ideas

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!