Cardinal Is Significantly Undervalued

The chickens have come to roost for

However, Cardinal remains in a strong long-term position within the U.S. pharmaceutical market and we are reiterating our wide moat rating. We are also incorporating these latest results into our DCF model and we will likely lower our fair value marginally. However, even with the lower valuation we anticipate the stock to remain undervalued by a material amount.

As we have previously stated, we are not enthusiastic about Cardinal's push into medical equipment manufacturing and distribution. Although global healthcare spending should remain robust for the foreseeable future, this is not the case for the low-tech medical and surgical products, which generally are commodities. In addition, we think the Cordis products were not necessarily in the top tier within their categories, and we believe Cardinal may have had to decrease pricing in order to preserve volume, pressuring profits. We have feared this dynamic would eventually develop for Cardinal and have long been negative toward its previous capital allocation policies and nondrug wholesaling acquisitions. We think management may ultimately have to look at alternative strategies for these assets.

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