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Stock Analyst Update

Cardinal Is Significantly Undervalued

Disastrous quarter aside, the wide-moat firm remains in a strong long-term position within the U.S. pharmaceutical market.


The chickens have come to roost for  Cardinal (CAH). It reported a disastrous quarter, largely driven by its Cordis medical device business. Management reported moderate decreases in profitability and lowered its EPS guidance for the remainder of the year as a result of losses emanating from its medical supply business. While this development is a major negative to say the least, we are not surprised by the issues the firm is facing within this segment. Last quarter, the firm hinted there could be headwinds on the horizon for its Cordis business, and these issues seem to have now fully matured.

However, Cardinal remains in a strong long-term position within the U.S. pharmaceutical market and we are reiterating our wide moat rating. We are also incorporating these latest results into our DCF model and we will likely lower our fair value marginally. However, even with the lower valuation we anticipate the stock to remain undervalued by a material amount.

As we have previously stated, we are not enthusiastic about Cardinal's push into medical equipment manufacturing and distribution. Although global healthcare spending should remain robust for the foreseeable future, this is not the case for the low-tech medical and surgical products, which generally are commodities. In addition, we think the Cordis products were not necessarily in the top tier within their categories, and we believe Cardinal may have had to decrease pricing in order to preserve volume, pressuring profits. We have feared this dynamic would eventually develop for Cardinal and have long been negative toward its previous capital allocation policies and nondrug wholesaling acquisitions. We think management may ultimately have to look at alternative strategies for these assets.

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Vishnu Lekraj does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.