A Look at The Big 3: Medical Stocks

Pharmaceutical distribution in the United States is dominated by three firms: Cardinal Health CAH, McKesson MCK, and AmerisourceBergen ABC. AmerisourceBergen is the purest play on this narrow-moat industry. However when siphoning through the numbers one sees their is a big contrast in their stock valuations. Without getting into the Presidents medical proposals, one needs to focus on the value of the individual businesses themselves. All three are trading at reasonable valuations, but digging into the numbers a little deeper, Cardinal Health is clearly the cheaper stock. Cardinal is trading near its book value, while the other two are over 2x book value. Cardinal also offers a much more attractive dividend yield. Cardinal's P/E ratio is currently half the industry average. While all three hold a bright outlook going forward Cardinal seems to have a margin of safety already built into its share price. This is not to say that its stock price could not fall from current levels but that it is trading at a cheaper valuation than the other two companies. With the aging of the population in the United States their is still much upside in this industry and Cardinal offers you a dividend while you wait.

AmerisourceBergen Corporation, a pharmaceutical services company, offers drug distribution and related services to health care providers and pharmaceutical manufacturers in the United States, the United Kingdom, and Canada. It distributes brand name and generic pharmaceuticals, over-the-counter health care products, home health care supplies and equipment, and related services to health care providers, such as acute care hospitals and health systems, independent and chain retail pharmacies, mail order facilities, physicians, medical clinics, and long-term care and other alternate site pharmacies.


Cardinal Health, Inc. provides health care products and services primarily in the United States. The company’s Health care Supply Chain Services segment distributes branded, private-label medical and laboratory, generic pharmaceutical, health care, and consumer products to retail customers, hospitals, and alternate care providers. It provides distribution, inventory management, data/reporting, new product launch support and contract, and charge back administration services, as well as operates a pharmaceutical repackaging and distribution program that offers repackaged pharmaceutical products.


McKesson Corporation, together with its subsidiaries, provides supply, information, and care management products and services for the health care industry. It operates through two segments, Distribution Solutions and Technology Solutions. The Distribution Solutions segment distributes ethical and proprietary drugs, medical-surgical supplies and equipment, and health and beauty care products in North America. This segment also provides specialty pharmaceutical solutions for biotech and pharmaceutical manufacturers; sells pharmacy software; and provides consulting and outsourcing services. The Technology Solutions segment provides enterprise-wide clinical, patient care, financial, supply chain, and strategic management software solutions; pharmacy automation for hospitals; and connectivity and outsourcing services.

Company Name	Symbol	Price (9/9/09)	P/B Ratio	Revenue (end June 30th)	Mkt Cap	P/E Ratio (TTM)	Dividend Yield	Debt/Equity Ratio
AmerisourceBergen	ABC	21.43	2.3	70.2b	6.39b	13.3	1.10%	.43
Cardinal Health	CAH	26.83	1.1	99.5b	9.36b	8.5	2.70%	.38
Mckesson	MCK	57.25	2.4	106.5b	15.18b	18.1	.90%	.37

Ignore The Headlines And Concentrate On Value

Ignore the headlines and concentrate on the fundamentals. The market has had a nice run the last two weeks bouncing up over 20%. Hey this is great but don't get caught in the hype. Sure you want the market to go up just like most everyone else, however to many people get caught up in the NOW, that is, what the Stock Market is doing today, this week or next month. Forget that crap and concentrate on investing in businesses. As an Independent Investor one needs to focus on the true worth or the actual value of the business. Its the same thing as if you were to buy a pizza parlor. How much does the business make? How long will it take to get my money out of it? How much debt do they have? Is this business located in the right place? Is this a dying business or a growing one? These are some of the things you would ask if you were buying an existing establishment. Well the same rules apply to the stock market, except most individuals and institutions do not adhere to these principals. Of course their is no sure fire way but if you focus on a few basic fundamentals such as book value or free cash flow this will help in whittling down some prospective investments. For those that might be new, book value is defined as the total value of the company's assets that shareholders would theoretically receive if a company were liquidated. Warren Buffett uses the book value as a measuring stick, often looking at the growth in book value. Free Cash Flow represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Currently Wellpoint $WLP is a good example of a business with excellent free cash flow.

These 3 Stocks Have A Medicinal Touch

Another hedge for uncertain times is the health care industry. The industry has been beaten down with the rest of the market . Many of these companies are trading at low p/e multiples well below their norm. Three that come to mind are Sanofi-Aventis(SNY), Pfizer(PFE), and Merck(MRK). All three
are trading at p/e's under 13 with debt/equity ratio's under .25 and all sport dividends around 5% or better with Pfizer having a 7.5 % yield. You also have some added support by big name value investors buying in. Warren Buffets Berkshire Hathaway has bought into SNY and Bruce Berkowitzs Fairholme Capital has about 10% of their fund invested. Plus all three have growing free cash flow.