Cardinal: A Healthy Pullback

05/05/2016 7:00 am EST

Focus: STOCKS

Crista Huff

Editor, Cabot Undervalued Stocks Advisor

Our latest strong buy recommendation is one of the largest US distributors of healthcare products and services, explains Crista Huff, editor of the newly-launched Cabot Undervalued Stocks Advisor.

Cardinal Health (CAH), a holding in my Growth & Income Portfolio, fell sharply after reporting a strong earnings beat. There is nothing wrong with the stock, nor with the company.

Cardinal Health reported strong third-quarter 2016 results (June year-end), reflecting 20%+ year-over-year gains in profits and revenues.

Earnings per share were $1.43, ten cents above the consensus estimate of $1.33; and revenues came in a fraction above consensus, at $30.66 billion.

The company narrowed its expected EPS range from $5.15-$5.35 to $5.17-$5.27, while the consensus estimate had been $5.28. Analysts will adjust that number in the coming days.

Even though there will only be a few pennies difference between the previous consensus estimate, and the forthcoming revised estimate, traders used that as an excuse to take profits.

Presuming a mid-range fiscal year 2016 profit of $5.22, that will still reflect a very attractive 19.2% profit increase from last year's $4.38 EPS.

The full-year 2017 consensus estimate is $5.94, reflecting 13.8% EPS growth; that estimate might also be revised downward by a few pennies.

The current 2017 price/earnings ratio is 13.7, and the dividend yield is 1.8%. The stock remains undervalued. Cardinal continues to grow its customer count, win new contracts, accomplish profitable acquisitions and repurchase shares.

Cardinal recently won a medical contract with Kaiser Permanente that's expected to add approximately $525 million to annual revenue and four cents to annual EPS.

There's also a bigger contract in play this summer, which could potentially add 10 to 15 cents to Cardinal's annual EPS. Ongoing concerns include foreign exchange volatility and generic drug pricing pressures.

I'm raising my rating on Cardinal Health to strong buy, now that the share price has come down a bit and the outlook remains very bright.

My recommendation is that traders and longer-term growth & income investors take advantage of the current lower share price.

There's upside price resistance at the stock's previous all-time high of $91.38, 12.6% higher than the current share price.

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By Crista Huff, Editor of Cabot Undervalued Stocks Advisor  

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