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Cardinal Health, Inc. (CAH), McKesson Corporation (MCK): The Search for Good Prescription Drug Value

Editor’s Note: The initial article references Cardinal’s safety issues. Upon further inspection, we found this to be misleading. This version has been corrected and Motley Fool apologizes for the error.

The world of wholesale medical companies sure ought to be a good deal, particularly with the recession over with. After all, the population is aging and has fixed incomes that can barely cover the huge number of prescriptions most people take on as they get older. Obesity is at an all-time high, with two-thirds of the adult population being overweight. So it makes sense that anything that lets health care be cheaper would be a solid investment if the companies are well run and a good deal. Let’s check out a few possible candidates for your portfolio.

Good deals can be expensive

Cardinal Health, Inc.Cardinal Health, Inc. (NYSE:CAH) operates the largest pharmacy that handles radioactive medical equipment in the country, and it also manufactures a variety of surgical products. Since many of a hospital’s highest profit-margin activities involve surgery, such as in the cardiac division, Cardinal Health, Inc. (NYSE:CAH)’s 60,000 locations present ample regional diversity. That’s good because local problems shouldn’t impact Cardinal Health, Inc. (NYSE:CAH) very much. Cardinal Health, Inc. (NYSE:CAH) is also a pretty decent deal, trading for around 14 times its earnings and one-fifth its sales per share.

Unfortunately, silver clouds have dark linings. Cardinal Health, Inc. (NYSE:CAH) may be forced to cut its rather nice 2.5% dividend in the near future because of cash-management issues. Cardinal could still be a good long-term contrarian play, but there’s no guarantee that the worst times are ending. If you’ve got a cast-iron stomach, this could be a decent place to put some “wild” money.

Big deals aren’t always good ones

McKesson Corporation (NYSE:MCK) has been on the cutting edge of many newer technologies, like RFID tags and pharmacy robotics. It was even one of the earliest to adopt bar codes on prescriptions during distribution. Also, McKesson Corporation (NYSE:MCK) has seen hard times through in the past, having been part of a massive scandal named for its earlier incarnation and changing the way auditing is handled. As one of the oldest operating companies in the US and the 14th largest, McKesson Corporation (NYSE:MCK) has proven itself to be a survivor. But is it a good deal?

Trading for 3.8 times its book value and around 21 times its earnings, one would be hard pressed to call McKesson Corporation (NYSE:MCK) an especially good deal. While the company does hold a lock on 77% of the health systems in the US and is gradually expanding into other countries, the fact that it’s turning a 1.1% profit margin doesn’t sit well. Unless McKesson Corporation (NYSE:MCK) can turn up its profits or drop its price substantially without developing some kind of fundamental issue, I would recommend avoiding this company.

Struggling to make a deal

AmerisourceBergen Corp. (NYSE:ABC) is intriguing because it came about through a merger of two companies that McKesson and Cardinal Health tried to purchase. With roughly $81 billion in annual revenue, AmerisourceBergen Corp. (NYSE:ABC) is the largest company headquartered in Pennsylvania. The company also has a wide network that includes acute care centers, doctors’ offices, clinics and retail pharmacies.