Cardinal Health, Inc. (NYSE:CAH) shares are down more than -13.44% this year and recently decreased -0.59% or -$0.37 to settle at $62.30. AmerisourceBergen Corporation (NYSE:ABC), on the other hand, is up 18.43% year to date as of 12/27/2017. It currently trades at $92.60 and has returned -1.27% during the past week.
Cardinal Health, Inc. (NYSE:CAH) and AmerisourceBergen Corporation (NYSE:ABC) are the two most active stocks in the Drugs Wholesale industry based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect CAH to grow earnings at a 5.24% annual rate over the next 5 years. Comparatively, ABC is expected to grow at a 8.14% annual rate. All else equal, ABC’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth doesn’t mean much if it comes at the cost of weak profitability. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return. , compared to an EBITDA margin of 1.03% for AmerisourceBergen Corporation (ABC). CAH’s ROI is 8.70% while ABC has a ROI of 8.70%. The interpretation is that CAH’s business generates a higher return on investment than ABC’s.
If there’s one thing investors care more about than earnings, it’s cash flow. CAH’s free cash flow (“FCF”) per share for the trailing twelve months was +3.03. Comparatively, ABC’s free cash flow per share was +5.52. On a percent-of-sales basis, CAH’s free cash flow was 0.73% while ABC converted 0.79% of its revenues into cash flow. This means that, for a given level of sales, ABC is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. CAH has a current ratio of 1.10 compared to 0.90 for ABC. This means that CAH can more easily cover its most immediate liabilities over the next twelve months. CAH’s debt-to-equity ratio is 1.50 versus a D/E of 1.84 for ABC. ABC is therefore the more solvent of the two companies, and has lower financial risk.
CAH trades at a forward P/E of 11.34, a P/B of 2.95, and a P/S of 0.15, compared to a forward P/E of 13.85, a P/B of 9.80, and a P/S of 0.13 for ABC. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. CAH is currently priced at a -8.82% to its one-year price target of 68.33. Comparatively, ABC is -2.68% relative to its price target of 95.15. This suggests that CAH is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 3.00 for CAH and 2.30 for ABC, which implies that analysts are more bullish on the outlook for CAH.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. CAH has a beta of 0.86 and ABC’s beta is 0.99. CAH’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. CAH has a short ratio of 4.55 compared to a short interest of 4.81 for ABC. This implies that the market is currently less bearish on the outlook for CAH.
Cardinal Health, Inc. (NYSE:CAH) beats AmerisourceBergen Corporation (NYSE:ABC) on a total of 9 of the 14 factors compared between the two stocks. CAH is more profitable, generates a higher return on investment, higher liquidity and has lower financial risk. In terms of valuation, CAH is the cheaper of the two stocks on an earnings and book value, CAH is more undervalued relative to its price target. Finally, CAH has better sentiment signals based on short interest.