Cardinal Health, Inc. (NYSE:CAH) shares are down more than -16.15% this year and recently decreased -1.26% or -$0.76 to settle at $59.59. AmerisourceBergen Corporation (NYSE:ABC), on the other hand, is up 9.85% year to date as of 12/05/2017. It currently trades at $85.97 and has returned 3.30% 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. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
The ability to grow earnings at a compound rate over time is a crucial determinant of investment value. Analysts expect CAH to grow earnings at a 6.37% annual rate over the next 5 years. Comparatively, ABC is expected to grow at a 8.24% 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.
Earnings don’t always accurately reflect the amount of cash that a company brings in. 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
Balance sheet risk is one of the biggest factors to consider before investing. 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 11.03, a P/B of 2.86, and a P/S of 0.15, compared to a forward P/E of 12.89, a P/B of 9.09, and a P/S of 0.12 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
Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. CAH is currently priced at a -13.26% to its one-year price target of 68.70. Comparatively, ABC is -5.42% relative to its price target of 90.90. 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 2.40 for ABC, which implies that analysts are more bullish on the outlook for CAH.
Risk and Volatility
Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. CAH has a beta of 0.87 and ABC’s beta is 0.97. CAH’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. CAH has a short ratio of 4.78 compared to a short interest of 5.36 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.