The combination of CVS Health (CVS) and Aetna is proving to be a success after initial skepticism by investors. CVS has broken out recently due to a string of better than expected quarters, in part attributable to the Aetna acquisition. CVS is generating large amounts of free cash flow, paying down debt, and returning value to shareholders in a variety of ways. To further boost long-term growth prospects, restore growth, and fend off potential competition, CVS combined with Aetna. This combination creates the first through-in-through healthcare company, combining CVS's pharmacies and PBM platform with Aetna's insurance business. The new CVS combines its existing pharmacy benefits manager (PBM) and retail pharmacies with the second-largest diversified healthcare company.
This is a bold and hefty price tag to pay yet necessary to compete in the increasingly competitive healthcare space, changing marketplace conditions, and political backdrop with drug pricing pressures. CVS made a defensive yet acquisition required to enable the company to go back on the offensive. CVS had been beaten down for years, plummeting by over 50% ($113 to $52) from its multi-year highs. As of late, CVS has broken out to the mid $70s on the heels of its positive string of earnings. At current levels, CVS presents a compelling investment opportunity while the company is still in the early stages of its CVS-Aetna combination, which drives shareholder returns.
The pharmaceutical supply chain cohort, specifically CVS, has been unable to obtain a firm footing in the backdrop of consolidation within the sector, negative legislative undertones, drug pricing pressures, rising insurance costs, and a market that has lost patience with these stocks. All of these factors culminated into sub-par growth with a level of uncertainty as the sector continued to face headwinds from multiple directions. Many of the stocks that comprised this cohort presented compelling valuations in a very frothy market. This allure had been a value trap as these stocks continued to disappoint. It's no secret that these companies have been faced with several headwinds that have negatively impacted the growth and the changing marketplace conditions have plagued these stocks. Continue reading "Transformation Underway - CVS Health and Aetna Combination"