Will Cardinal Health's New CEO Hold Things Together?

Cardinal Health (CAH) is in the right business at the right time: diversified healthcare. Cardinal has a suite of companies that serves as the middlemen, the go-between between the manufacturers and the hospitals and drug stores for services and medical products. It provides manufacturing, packaging and delivery services to pharmaceutical companies (like the recently announced deal to manufacture and package Tamiflu for Roche), and sells point of use systems to facilitate automated distribution of drugs and supplies to hospitals.

With the growing healthcare needs in this country, and with Cardinal’s diverse yet related group of companies, you’d think this is a pick. But it is not. I don’t think that Cardinal Health’s positives outweigh their negatives. While their many businesses are smartly aligned to help one another, Cardinal has two strong competitors in McKesson (MCK) and Amerisource Bergen (ABC). And while their financials are solid on paper, their managers are far too richly compensated -- in addition to handsome cash pay, the top five execs received over $80 million in stock grants in 2005.

Further, the SEC is looking into the company’s alleged intentional misleading of shareholders in 2004. They’ve taken the right efforts to staunch any damage, including appointing a new CFO, CEO, treasurer, and chief accounting officer, and forming a new ethics and compliance officer position. But this is a big company made of diverse parts. Its former CEO held the position for the life of the company of 35 years. Will the new CEO, while fraud-free, be able to hold everything together?

Type of stock: A $28.41 billion market cap healthcare industry stock, Cardinal has diversified its portfolio to maximize cross-over potential. But with its alleged accounting improprieties, its overcompensation of its leaders, and its competition, I’m not convinced this is a winner pick.

Price target: Currently trading in the $67 range, I would not buy unless this dips to the low $50s. Let’s see how the SEC investigation plays out.