CAH is currently trading at a trailing twelve months P/E of 12.69 and a trailing twelve months EV/EBITDA of 6.51. Current P/E valuations represent a 16% discount to its five year average P/E of 15.18. CAH achieved an ROE of 18.4% over the past twelve months and a five year average ROE of 12.3% .
Financial and Business Risks
CAH has a moderate gearing of 46% and a low net gearing of 7%. In addition, it has a healthy interest coverage ratio of 16.
CAH's five largest customers, including CVS Caremark Corp. and Walgreens Co, accounted for 59% of 2012 revenue; CVS Caremark is CAH's largest customer, accounting for 22% of CAH's 2012 revenue. Contracts with CVS and Walgreens are currently scheduled to expire in June 2013 and August 2013, respectively. In August 2012, Walgreens issued a request for proposal for pharmaceutical distribution services for the three-year period beginning after the expiration of CAH's contract with Walgreens. In April 2012, Express Scripts, which was CAH's third largest customer in 2012, merged with Medco Health Solutions Inc., a pharmaceutical distribution customer of a competitor. In July 2012, CAH was informed that it was not awarded the contract for Express Scripts' combined pharmaceutical distribution business.
CAH distributes branded and generic pharmaceutical, over-the-counter healthcare, and consumer products through its pharmaceutical distribution business to retailers, hospitals, and other healthcare providers. Lower than expected generic pharmaceutical launches or launches that are less profitable than its predecessors will have a negative impact on its margins. Also, if branded pharmaceutical manufacturers increase prices with a smaller frequency or amount, margin expansion for CAH will be muted.
Changes in the U.S. healthcare environment, in particular federal healthcare legislation may impact CAH negatively. CAH could be adversely affected by changes in the delivery or pricing of, or reimbursement for, pharmaceuticals, medical devices or healthcare services.
Business Quality and Capital Allocation
CAH is well-positioned to capitalize on the increasing demand for healthcare driven by aging populations, chronic care requirements and increased access, in addition to an increased focus on improved cost effectiveness. CAH is focused on productivity to efficiently support the additional patients in the system through its scale and reach across the system.
CAH's pharmaceutical, medical-surgical and laboratory offerings help hospitals to improve processes, streamline operations and simplify distribution. It also works with home healthcare agencies to make product selection, online ordering and inventory management easier. CAH provides hospital, retail independent and retail chain pharmacy customers with pharmaceutical products along with logistics, inventory solutions, business and marketing support.
CAH has paid dividends every single year since 1995 and sports a dividend yield of 2.7% with a corresponding dividend payout ratio of 28%. It increased its dividend twice within a span of six months, with an increase of 10.5% realized in July and a further 16% increase announced in October. On Aug. 8, 2012, CAH announced that its board of directors approved a new, three-year authorization to repurchase up to $750 million of its shares. Out of the $750 million unauthorization approved in November 2010, $200 million remained unutilized. CAH repurchased approximately $150 million and $200 million in shares in the fourth quarter of fiscal year 2012 and the first of quarter of fiscal year 2013, respectively.
Contract renewals for CAH's largest customers CVS Caremark and Walgreens continue to weigh down heavily on CAH's valuations. Any investor taking a position in the stock, will have to make an intelligent guess on the likelihood of contract renewals. I will pass on this one now.
The author does not have a position in any of the stocks mentioned.