North America Equity Research

Moving to an Overweight Rating and $47 Price Target from Not Rated Following a period of restriction on Cardinal we resume coverage with an Overweight rating and a December 2013 price target of $47 (Overweight rating and Dec-2013 price target of $50 prior to restriction) from a Not Rated designation. We continue to have a positive long-term view of CAH, although yesterday’s announcement of the loss of the Walgreens business is a disappointment and could limit upside in shares of CAH in the near term.

We are positive on the AssuraMed acquisition, the potential impact from healthcare reform and believe that the continued mix shift to higher-margin businesses could be a driver of multiple expansion longerterm. That said, the CVS contract remains an overhang and the stock may only perform once we get past that hurdle. ? We view F2014 as a “reset” year and believe there could be upside to our estimates and CAH’s initial targets. CAH’s initial F2014 target of “at least similar to F2013 guidance of $3.

42 to 3. 50″ includes the estimated $0. 18 of accretion from AssuraMed and share repurchases; although CAH mgmt would not quantify the level of repo included. Mgmt did cite a “meaningful” benefit to cash flow from the loss of WAG, which we estimate could be as much as $1bil. We believe CAH will use the additional capital in a disciplined manner either through share repurchases, dividends and/or further acquisitions, which could drive upside from initial targets.

We note importantly that sourcing is not expected to be impacted from the loss of WAG. While CAH purchases branded drugs for WAG under its own contracts, when CAH is the secondary supplier of generics for WAG those drugs are purchased under WAG’s contracts, therefore CAH’s generic purchasing leverage should remain unchanged. ? CVS contract renewal remains a hurdle, yet our estimates include expectations for margin compression.

We believe there is less risk with the CVS contract renewal as the business dynamics are different from those of WAG and we believe that CVS is satisfied with its dualdistributor relationship with CAH and MCK. Going forward, we assume lower revenue due to the generic-shift and lower margins on the new CVS contract. Cardinal Health, Inc. (CAH;CAH US) 2011A EPS ($) Q1 (Sep) 0. 66 Q2 (Dec) 0. 73 Q3 (Mar) 0. 81 Q4 (Jun) 0. 60 FY 2. 80 Bloomberg EPS FY ($) 2. 67