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Investment idea - Cardinal Health

Cardinal Health (CAH), a major US healthcare company, distributing drugs, manufacturing healthcare products, as well as providing consulting and other services to medical companies, recently released a strong financial report for 1Q FY16. Revenue rose 16.6% y-o-y to USD 28.06 bn, outpacing expectations by 3%, due to both organic growth and recent acquisitions. Notably, the company recently acquired Cordis, a division of Johnson & Johnson, manufacturing diagnostic and interventional products to treat patients who suffer from coronary and peripheral vascular diseases, for USD 1.944 bn. Cardinal Health also recently acquired Harvard Drug Group, a major pharmaceutical distributor, for USD 1.15 bn. Synergy from these transactions will positively affect financial performance of Cardinal Health. Operating profit surged 30.2% y-o-y to USD 737 mn, while operating margin climbed 2 pps to 2.6%. Adjusted EPS spiked 38.0% y-o-y to USD 1.38, outstripping the consensus by 28 cents.

Strong report for Q1 allowed the company’s management to upgrade its financial forecast for FY16. According to the new forecast, EPS was revised up from USD 4.85-5.05 to USD 5.15-5.35.

In addition, the company raised its quarterly dividend to 38.75 cents (+12.8% q-o-q), yielding 1.8%.

We believe that new acquisitions will improve the company’s financial performance and, coupled with higher dividend, boost share price of Cardinal Health in the mid-term. We left our valuation of Cardinal Health shares unchanged at USD 100 and reiterate a Buy recommendation in the mid-term. The short-term technical target is USD 91.