Walgreen Company (WAG), Cardinal Health Inc (CAH), AmerisourceBergen Corp. (ABC): A 6% Drop in the Largest National Drugstore Is a Buying Opportunity

Many investors might consider the loss of big customer could harm Cardinal Health’s overall business, however, it has some positive consequences. When the Walgreen contract expires, Cardinal Health Inc (NYSE:CAH) would need lower inventory and account receivables. Because of the lower working capital needs, the company expects to generate an extra cash of $500 million. Moreover, as the Walgreen contract was a low margin business, the loss of Walgreen could push up Cardinal Health’s distribution margin, from 1.6% to 2%.

Among the three companies, investors might like Cardinal Health Inc (NYSE:CAH) and Walgreen because of their decent dividend yields, at 2.6% and 2.3%, respectively, while the dividend yield of AmerisourceBergen Corp. (NYSE:ABC) is the lowest at 1.5%.

Of the trio, Walgreen Company (NYSE:WAG) is the most expensively valued. At $45.20 per share, it is worth $42.80 billion on the market. The market values Walgreen at 10.8 times its trailing (Earnings before interest, taxes, depreciation and amortization) EBITDA. AmerisourceBergen is trading at $53.60 per share, with the total market cap of $12.40 billion. It is valued at nearly 9 times its trailing EBITDA. Cardinal Health has the lowest EBITDA multiple. At $46.60 per share, it is worth $15.90 billion on the market. The market values Cardinal Health at 7.4 times its trailing EBITDA.

My Foolish take

Income investors might still consider both Cardinal Health Inc (NYSE:CAH) and Walgreen as long-term stocks for their portfolios due to their decent dividend yields. Cardinal Health, with the potential higher distribution margin with lower working capital needs and low valuation, could be a good buy for shareholders. Walgreen, with their global leading positions, the potential synergies with Alliance Boots and the vertical integration with AmerisourceBergen Corp. (NYSE:ABC) could also fit well in long-term investors’ portfolios.

The article A 6% Drop in the Largest National Drugstore Is a Buying Opportunity originally appeared on Fool.com and is written by Anh Hoang.

Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Anh is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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