Cardinal Health Clips Its Wings

Cardinal Health (NYSE: CAH) says the sum of its parts are worth more to investors than the company as a whole.

The drug wholesaler said Monday that it's going to spin off its clinical and medical products businesses -- infusion pumps, ventilators, surgical instruments, and the like. The spinoff is expected to be complete by the middle of next year.

The move could benefit shareholders a little. Cardinal's medical products business has been the shining part of the company, and the spinoff could garner an earnings multiple closer to competitors like Baxter (NYSE: BAX) and Hospira (NYSE: HSP). But at less than 5% of total sales -- albeit a higher percentage of earnings -- the split isn't unleashing that much pent-up valuation.

Further, I can't see how the split is going to help Cardinal compete with McKesson (NYSE: MCK) and AmerisourceBergen (NYSE: ABC) in the drug distribution business. Sure, management says it can be more focused with the medical products business gone, but that sounds like an excuse at this point.

In order to grow the business, Cardinal is going to have to increase the volume of drugs it distributes. It's a numbers game in this low-margin business, after all. It's also going to need to take advantage of all the up-and-coming generic drugs. Those factors seem to have little to do with whether it has a separate division selling medical equipment.

Breaking up companies often provides some wacky valuations that ultimately prove beneficial for shareholders, but smart investors buy shares only if they're interested in ultimately owning both companies. Personally, I'll be sitting out until after the breakup or until I have more confidence that Cardinal's management can grow its drug distribution business.

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