Cardinal Health (CAH) is one of the companies with a long story of successful modeling. In September 2009, we first estimated a preliminary two-component model from the full set 73 CPI components. As in all our models, we predict the monthly closing price adjusted for splits and dividends. Here, we revisit the previous model using all data available on April 24th and an extended set of CPIs. Also, all time series are 18 months longer what provides a better resolution and reliability.
For CAH, the defining indices are as a year and two years ago: the index of dairy and related products (DAIRY) and the index of pets, pet products and services (PETS). The CPI components are both leading by 2 months. Figure 1 depicts the evolution of both indices which provide the best fit model, i.e. the lowermost RMS residual error, between July 2008 and March 2011:
CAH(t) = -0.38DAIRY(t-2) – 1.69PETS(t-2) +11.33(t-1990) + 136.12
where CAH(t) is the share price in US dollars, t is calendar time.
The predicted curve in Figure 2 is synchronized with the observed one. The residual error is of $2.58 for the period between July 2003 and March 2011. The next move in the price is likely down according to the growth in both defining indices.
Figure 1. Evolution of the price indices DAIRY and PETS.
Figure 2. Observed and predicted CSC share prices.