For investors looking for a mix of chance and caution, the "Growth at a Reasonable Price" (GARP) or "Affordable Growth" method provides a solid middle path. This method tries to find companies with good and lasting expansion, but whose stock prices are not too high. It avoids the risky excitement that can come with popular growth stocks and also steers clear of value stocks that are inexpensive because of poor prospects. By concentrating on businesses with good basic foundations in earnings and financial condition, the method looks for lasting investments where the current cost is supported by possible future profits, not just optimism.
Cardinal Health Inc (NYSE:CAH) recently appeared from such a careful filtering process. The healthcare distribution and products company serves as an example of how a big, mature firm can still show the expansion traits that GARP investors like, all while being priced at a level that does not assume flawless performance.
A Detailed View of Expansion Measures
The central attraction of Cardinal Health in this situation is its solid expansion outline, which gave it a ChartMill Growth Rating of 7 out of 10. This grade shows good points in both recent results and what is anticipated next.
- Good Earnings Path: The company's Earnings Per Share (EPS) rose by a notable 24.32% over the last year, adding to a steady past yearly growth rate of 8.62%. Experts forecast this pace to keep going, with EPS predicted to rise by about 14.46% each year in the near future.
- Constant Revenue Growth: Revenue expansion is also positive, having gone up by 10.13% last year. The company has shown it can regularly increase its sales, with a long-term yearly growth rate of 7.80%. Upcoming forecasts point to a faster pace, with revenue growth expected at 9.66% per year.
- Upward Trend: Significantly, the basic report shows that both EPS and revenue growth rates are speeding up. This pattern of gaining pace is an important factor for expansion investors, as it implies the company's operations are moving forward rather than standing still.
This steady and quickening expansion is exactly what the Affordable Growth filter looks for, a company that is clearly increasing its earnings ability, giving a basic support for future stock price gains.
Price Assessment: Fair for the Expansion Provided
While expansion is necessary, paying a fair cost for it is the other part of the GARP idea. Cardinal Health's ChartMill Valuation Rating of 5 shows a varied but generally acceptable situation, particularly when considered next to its growth speed.
- P/E Ratios Compared: The company's standard Price-to-Earnings (P/E) ratio of 22.48 is seen as "fairly high" by itself. However, this must be weighed against similar companies and its own growth. This P/E is lower than 65% of companies in the Health Care Providers & Services field, where the average P/E is much higher, above 44.
- Future and Comparative Cost: A more revealing measure is the Forward P/E of 18.94, which is not only lower than 62% of field competitors but also rests under the present S&P 500 average of 24.82. This indicates the market has not completely accounted for the predicted earnings expansion.
- The Strong PEG Suggestion: The most straight connection between price assessment and expansion is the Price/Earnings to Growth (PEG) ratio. The review states that CAH's "low PEG Ratio... shows a fairly low price assessment of the company." This is the main point of the GARP view: the stock's price level is supported, and maybe even low, relative to its forecasted earnings expansion speed.
This price assessment setting is important. It means an investor is not spending too much for Cardinal Health's expansion outlook now, which matches well with the filter's search for stocks that are "not priced too high."
Supporting Basics: Condition and Earnings
An affordable expansion stock must be more than just low-priced and growing; it requires a steady base. The filter needed "acceptable" grades in earnings and financial condition, which Cardinal Health provides with a score of 5 in both groups.
The Earnings score of 5 is helped by high returns on capital. The company's Return on Invested Capital (ROIC) of 14.50% not only goes past its cost of capital, meaning it produces real owner value, but also does better than 91% of its field competitors. This shows very effective use of capital to create profits. The primary limit on the earnings score comes from usually small operating and gross margins, which is a typical feature of the distribution business model but is balanced by high volume and effectiveness.
The Financial Condition score of 5 shows two sides. On the good side, the company displays high ability to pay debts, with a strong Altman-Z score and a very low debt-to-free-cash-flow ratio of 1.64, showing it could clear all debt in less than two years from its cash flow. This is a mark of soundness. The worry is in cash availability measures, with current and quick ratios under 1, suggesting a dependence on steady operational cash flow to meet near-term needs, a point investors should watch.
Final Thoughts and Next Steps
Cardinal Health Inc shows the kind of find an Affordable Growth filter is made to locate: a company with a clear and quickening earnings expansion story, priced at a level that is fair both compared to its past and its future possibility. Its high returns on capital and good ability to pay debts provide a basic support that backs the expansion picture. While cash availability measures need watching, the full outline fits the GARP goal of finding expansion without too much risk.
For investors curious about using this careful method, a ready-made "Affordable Growth" filter can be found here, which can help find other companies fitting similar needs for good expansion, fair price assessment, and acceptable basics.
Disclaimer: This article is for information only and is not financial guidance, a suggestion, or a bid or request to buy or sell any securities. The review uses data and instruments given by ChartMill. Investors should do their own study and talk with a registered financial consultant before making any investment choices. Past results do not guarantee future outcomes.