Since Sep 24, healthcare stocks have been outperforming S&P 500 stocks. If you are considering buying a healthcare stock then may be you should look at Cardinal Health Inc.(CAH)

Cardinal Health, Inc is a good investment case of, what I consider, riding the boom. Depending on shifts in market demand, a particular sector may be the flavor of the day. Say, suppose you are bullish on healthcare stocks. Rather than investing in healthcare stocks directly as their topline may be subjected to fluctuations, you should choose those stocks that can ride on healthcare boom. Cardinal is one such stock.   

In today's rapidly changing healthcare industry, care providers face unyielding pressure to improve quality, maintain operating margins and lower costs. Cardinal Health, Inc. is a leading health care provider of products and services supporting the health care industry. Cardinal is poised to ride the boom better than other stocks. Moreover, the stock is now relatively cheap at $26.22 compared to its 52 week high of $51.28. The stock is not beaten down due to any serious negative concerns. The stock is trading lower due to the spinoff of its Clinical and Medical Products business, now a new public company called CareFusion Corp.

Strong fundamentals are likely to support higher P/E

Currently the stock is trading at a P/E of 8.3. I believe, the company's fundamentals can support a P/E in the range of 11 and 12.

Prior to the Clinical and Medical Products segment (now CareFusion Corp) spin-off Cardinal Health, Inc. consisted of three primary subsidiaries, Pharmaceutical Distribution, Pharmaceutical Services and Medical Surgical Products.

The divested CareFusion posted sales of $4.59 billion and a profit of $670 million in fiscal 2009. The spinoff is not likely to impact Cardinal Health's revenue drastically. For the record, Cardinal Health reported a 9% year-over-year revenue gain, to $99.51 billion, for its 2009 fiscal year ended June 30. However, the impact on net income is visible as the divested segment accounted for 58.3% of Cardinal's net profit in 2008. CareFusion paid $1.4 billion to Cardinal for the spin-off.

With the spin-off now done, Cardinal Health should benefit from enhanced management focus and sharper strategic vision, as well as improved opportunities to make investments in growth areas. The company's core businesses are strong and the investments the company is making in fiscal 2010 will create a more positive and sustainable longer-term growth trajectory.

Cardinal is also looking to raise GBP150 million by divesting in its U.K.-based subsidiary Martindale Pharmaceuticals which it acquired as part of its GBP 233 million takeover of Intercare six years ago. The company reportedly has attracted interests from groups such as the former private equity arm of Close Brothers, CBPE Capital, and LDC, the private equity arm of the Lloyds Banking Group (LYG, LLOY.L). Other private equity groups in the running include Silverfleet, the former buy-out arm of Prudential; AAC Capital, the private equity group that spun out of ABN Amro last year as well as and Exponent, which was set up by four former 3i dealmakers in 2004.

At the end of fiscal year ending June 2009, Cardinal's long term debt declined to $3,280 million from $3,687 million at the end of June 2008. Cardinal used the proceeds from CareFusion spin-off to buyback its debt securities worth $1.2 billion. So, the debt should come down to $2.4 billion. The divestiture of Martindale should help Cardinal to reduce its debt even further.

The company's total equity rose to $8,724 million at the end of June 2009 from $7,747 million at the end of June 2008. The company's liquidity measures (Current Ratio, Quick Ratio, and Cash Ratio) have improved over the last one year. Though profitability margins have come down from previous year levels, I expect them to headup as divestitures should tighten costs.

Looking at revenue headline - on September 28, Cardinal signed a five-year, sole-source laboratory products supply agreement with Novation, effective October 1 and runs through 2014. Under the terms of the deal, Cardinal Health will be the exclusive provider of laboratory products to Novation's clinical acute members, which includes hospital laboratories, core labs, blood banks and reference laboratories. This will include service to all VHA, University HealthSystem Consortium (UHC) and Provista customers.

I expect the company's earnings to grow next year by 9.5% over this year. Over the next five years, the company is expected to grow earnings at an average annual rate of 10%. I see a one year target price of $28 for the company.