Stock Market Riddle Reveals Big Opportunity

Imagine a company generating $210 billion in revenues, what do you think it would be worth? To give you a clue, Alphabet produces $297 billion in revenues and is worth almost $1.8 billion. Can you take a stab now at what this other firm is worth?

There is lots of information you need to answer the question so we’ll cut to the chase and share with you that the company in question, Cardinal Health, has a market cap of just $26 billion.

How can two companies both generate north of $200 billion in revenues but one be worth about 70x the other?

Key Points

• Cardinal Health has massive revenues but low gross margins hurt its profitability. 
• It’s trading at an exceptionally low price-to-sales ratio but a sky high PE ratio right now.
• A valuation analysis reveals significant upside potential, which insiders appear so confirm.

Stock Market Riddle

The answer to the riddle is found in the gross margins of the two firms, and consequently their profits. While Alphabet has a gross profit margin of around 57%, Cardinal Health has a slim margin of just 3% and that dominos through the income statement, meaning Alphabet enjoys about $21 billion of earnings before interest and taxes while Cardinal Health posts just half a billion.

Clearly, Wall Street rewards the higher profits but in the Cardinal Health figures is arguably an opportunity to buy a stock on sale.

Is Cardinal Health on Sale?

You don’t get any indications that Cardinal Health is a bargain by looking at analysts estimates – they have fair value assessed at about the same level as the current share price.

Where the opportunity arises is in the cash flows and specifically a discounted forecast analysis of them that puts fair value much higher at closer to $140 per share.

The cash flows analysis provides a clue that Cardinal Health may be selling at a discount and the confirmation comes from management’s buyback that highlights insiders conviction in the prospects of the firm.

Is It Worth Buying For Its Dividend?

While the upside opportunity is attractive all by itself, the dividend of almost 2% provides another reason to entice investors who want a steady firm with massive revenues and trustworthy payout that has been approved by the Board of Directors for 36 years straight.

The yield alone is not so large as to warrant buying the stock but when combined with the upside opportunity, a case can be made for investing.

Is Cardinal a Buy?

Some other reasons to buy the stock are the growing net income that is forecast for this coming year as well as the low stock price volatility.

At a time when turbulence is increasingly forecast, the stability this healthcare firm can provide is reason enough to consider it. With its massive revenues it may be the beacon of light investors need when economic times turn gloomy.

Perhaps that’s why one fund with $13 billion plus has taken a stake of over $300 million. They see a place to park capital when the sun sets on this latest bull run.