ModernGraham Valuation Of Cardinal Health

| About: Cardinal Health (CAH)

Here is a look at how Cardinal Health (NYSE:CAH) fares in ModernGraham's opinion, based on an updated and modernized version of Benjamin Graham's requirements of defensive and enterprising investors from The Intelligent Investor:

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 3/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
  3. Earnings Stability - positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record - has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - FAIL
  6. Moderate PEmg ratio - PEmg is less than 20 - FAIL
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - FAIL
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - PASS
  3. Earnings Stability - positive earnings per share for at least 5 years - PASS
  4. Dividend Record - currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - FAIL

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $21.50
MG Opinion Overvalued
Value Based on 3% Growth $37.18
Value Based on 0% Growth $21.79
Market Implied Growth Rate 8.84%
Net Current Asset Value (NCAV) -$4.35
PEmg 26.19
Current Ratio 1.28
PB Ratio 3.64
Click to enlarge

Balance Sheet - 9/30/2013

Current Assets $16,037,000,000
Current Liabilities $12,507,000,000
Total Debt $3,693,000,000
Total Assets $23,816,000,000
Intangible Assets $5,570,000,000
Total Liabilities $17,519,000,000
Outstanding Shares 341,000,000
Click to enlarge

Earnings Per Share

2014 (estimate) $3.66
2013 $0.97
2012 $3.06
2011 $2.74
2010 $1.62
2009 $3.16
2008 $3.61
2007 $2.07
2006 $2.90
2005 $2.40
2004 $3.47
2002 $1.85
Click to enlarge

Earnings Per Share - Modern Graham

2014 (estimate) $2.56
2013 $2.11
2012 $2.74
2011 $2.60
2010 $2.57
2009 $2.98
Click to enlarge

Conclusion:

Cardinal Health Inc. is not suitable for either the Defensive Investor or the Enterprising Investor. The company's current ratio is too low for either investor type, the company has not significantly grown its earnings over either a five year period or a ten year period, and the company trades at too high a PEmg and PB ratio. As a result, investors seeking to follow ModernGraham's updated version of Benjamin Graham's requirements for Intelligent Investing should do further research into other companies, beginning with a review of the 5 Low PE Companies we reviewed this weekend on Seeking Alpha.

From a valuation perspective, Cardinal Health has shrunk its earnings from $2.98 in 2009 to an estimated $2.56 for 2014. Meanwhile the market is implying a growth estimate of 8.84%, which is clearly well above the historical performance of the company. As a result, Cardinal Health appears to be overvalued at the current time.

What do you think? Do you agree that Cardinal Health Inc. is overvalued? What would be your assessment? Is the company not suitable for Defensive Investors or Enterprising Investors?

Disclosure: The author did not hold a position in Cardinal Health (CAH) at the time of publication and had no intention of entering into a position within the next 72 hours.