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Cardinal Health (NYSE:CAH) is one of the leading wholesale distributors of pharmaceuticals, medical/surgical supplies, and related products to a broad range of health care customers. The company completed a unit spin-off, CareFusion (NYSE:CFN), on 9/1/09. Any investors with shares of CAH at the end of August received 0.5 shares of CFN. As a result, CAH price was adjusted down to $25.11 on 9/1/09 from $34.58 on the previous day. Two weeks later, Goldman Sachs upgraded CAH to a "buy" rating from "neutral" with a target price of $31. The stock closed at $27.29 on that day.

I pitched Cardinal Health to my readers several times prior to this writing. The first was a simple technical look at this stock on 6/11, 7/11, and 8/20. What I saw then was a stock with great fundamental developing a strong technical pattern called "triple bottom". Today I pitch you Cardinal Health once again with the different view. If you purchased this stock without selling them as I did, you would have done very well. As an added bonus, you would've gained some shares of CareFusion which rose 10.5% since it began trading. So let's dig into the number.

Cardinal Health came back on my radar on 9/18 watch list as because it appeared to be within 20% from the yearly low. A closer look at CAH shows a revealing valuation proposition. CAH is currently trading at 1.11x book value, 12x Forward P/E, 6x Cash, and 2.6% dividend yield. The undervaluation appeared to be because of the split but CFN is also trading at a discount value when you see it is trading at 0.88x book value. CAH is estimated to grow 8.4% (based on low estimate) and with yield of 2.6% that is a good 11% return. The great thing is the top line revenue is expected to stay relatively flat which mean they will be more efficient.

Using dividend as an insurance against price decline, investors will be rewarded with $0.70 per shares or 2.6% yearly. With low earning estimate of $1.89 for 2010, the payout ratio is 37%. Taking the previous year dividend increase rate, I project that CAH will raise payout to $0.74 for 2011. Low end estimate is projected at $2.05 which brings payout ratio down to 36%.

My model shows CAH should be at $40 range but this is based on previous year results including figures from CFN. Surely I could be wrong and price fall, but as a value investor, I will not get many chances to buy a medical company at or near its book value. Given that all CAH competitors (ABC, MCK, and OMI) are trading at more than 2.3x book value, CAH is deeply discounted at 1.1. My estimate shows any 1.95x book to be low end of CAH and that would bring share price to $47. A 74% gain! That is just crazy. I will probably re-buy this stock in the days ahead.

Disclosure: None

Source: Cardinal Health Is Undervalued