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
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top Businesses to Invest In

Top 5 Things You Might Be Doing Wrong With Your Business

Top 5 Strategic Technology Trends in 2014

Top Rags to Riches Stories

Parenting Behavior That Promotes Future Leaders

Top 5 Mistakes Made by Small Businesses

Top 5 Most Common and Potentially Devastating Financial Blunders

Top 5 Highest Paying Jobs for Web Designers

Top 6 Most Respected Professions that Also Pay Well

Top 5 Pitfalls Investors Should Avoid

Top 6 Lawyers and Policy Makers Under 30

Top 6 New Year’s Resolutions for Entrepreneurs

Top 7 Locations to Check in on Facebook

Top 5 Mistakes made by Rookie eBay Sellers

Top 7 eBook Publishers in 2013

Top 6 Health Industry Trends in 2014

5 Lessons for Entrepreneurs from Seth Godin

Top 5 Success Tips from Jordan Belfort – the Wolf of Wall Street

Best Master’s in Finance Degree Programs

Top 6 Earning Celebrities Over 50

The most expensive sports to play

Top 7 Earning Celebrities Under 25

Best 7 Online Courses to Take: Free Finance MOOCs

Top 6 Bad Habits that Promote Failure

20 Most Valuable Soccer Teams in the World in 2013

12 Most Expensive Countries for Foreign Students

Top 30 Most Influential Women in the World

Top 20 Most Expensive New Year Eve Shows

Top 5 Best Vocational Careers

Top 10 Jobs for 2014 by Salary Gain (Predictions)

Top 5 Digital Trends for 2014

Top 6 Things You Can Do To Increase Your Productivity

Top 9 Trending Smartphones in 2013

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!