Skip to Content
Stock Analyst Update

Cardinal Is Significantly Undervalued

Disastrous quarter aside, the wide-moat firm remains in a strong long-term position within the U.S. pharmaceutical market.


The chickens have come to roost for  Cardinal (CAH). It reported a disastrous quarter, largely driven by its Cordis medical device business. Management reported moderate decreases in profitability and lowered its EPS guidance for the remainder of the year as a result of losses emanating from its medical supply business. While this development is a major negative to say the least, we are not surprised by the issues the firm is facing within this segment. Last quarter, the firm hinted there could be headwinds on the horizon for its Cordis business, and these issues seem to have now fully matured.

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.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

Vishnu Lekraj does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.