It’s called merger mania. Also waiting to tie the knot: Retail pharmacy giant CVS Health (CVS, Financial) and its betrothed, heath insurer Aetna (AET, Financial).
The two mega-companies are feeling emboldened by this week’s ruling, which is permitting the union of AT&T (T, Financial) and Time Warner (TWX, Financial) to proceed. (Meanwhile, Comcast (CMCSA, Financial) submitted a $65 billion bid for Twenty-First Century Fox (FOX, Financial)(FOXA, Financial). The bid outmatches rival Walt Disney Co.'s (DIS, Financial) $52 billion all-stock proposal.
As in a marriage where two people pool resources to form an even stronger entity, the Aetna-CVS combination is predicted to create among the most powerful players in the health care space.
Wall Street appears to like the idea as markets have expressed nothing but enthusiasm, so far, for the CVS-Aetna merger. As proof, look no further than the rising stock prices of the two companies, as well as others who are contemplating similar unions.
Sprint Corp. (S, Financial), which is hoping to merge with T-Mobile (TMUS, Financial), was up more than 1% in late afternoon trading on Thursday. Shares stood at $5.46. T-Mobile was up more than 1.4% to $59.53 a share at market close. Other media companies that have expressed similar interest, including Viacom Inc. (VIA, Financial) and CBS Corp. (CBS, Financial), also saw gains of more than 1% in trading.
Shares of CVS Health popped 3% over the last three days to more than $69 a share near market close. Meanwhile, shares of Aetna gained $7 to a total price of $188 per share, just 24 hours after the AT&T-Time Warner ruling was disclosed. Since late March, shares of both companies have climbed as much as 14%.
Six-month waiting period
After the success of AT&T and Time Warner, investors are betting on a six-month waiting period, no more, no less, for antitrust regulators to approve the CVS-Aetna deal. As you recall, the two mega-companies unveiled their engagement back in December. CVS disclosed it was hoping to acquire the health care benefits giant for $69 billion.
Let’s take a look at the fundamentals of the health care giants.
Aetna Inc.
The managed-care organization has more than 22 million members across the U.S. The power of its numbers has rewarded Aetna with a string of competitive advantages. It provides health insurance services to members with products that encompass every major insurance market, individual group and government sponsored.
It has a market cap of $61.62 billion.
Over 15 years, the company has seen steady growth in its revenue per share and earnings before interest, taxes, depreciation and amortization. For example, it raised revenue per share to $183.23 a share in the trailing 12 months. In 2003, revenue stood at $28.44 per share. EBITDA was $2.76 per share in 2003, and has climbed to $18.45 per share in the trailing 12 months.
GuruFocus has noticed that the company’s revenue growth has slowed down. For example, it reported $60.7 billion over the trialing 12 months, compared to $60.53 billion in December 2017 and $63 billion in the prior year.
Analysts have attributed some of the slowdown in recent quarters to increased spending on growth initiatives and lower premiums in its health care segment, and lower membership in its products that were compliant under the Affordable Care Act.
Earnings have grown at an average annual rate of 10.6% over the last decade, 7.4% over the last five years and 91.50% over the last 12 months. Its performance gives it a 4.5 out of 5 business predictability rating, which is bestowed by GuruFocus on stocks of companies that grow earnings at a rate of 10.5% a year.
The company reported long-term debt of $1.5 billion in the trailing 12 months. In December, it reported debt of -$874 million versus the prior year’s $3.44 billion in long-term debt.
GuruFocus shows a number of gurus initiated a position in Aetna in the first quarter. Leucadia National (Trades, Portfolio), Louis Moore Bacon (Trades, Portfolio), Daniel Loeb (Trades, Portfolio) and John Paulson (Trades, Portfolio) bought shares. A number of others expanded their holdings, including Jeremy Grantham (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Lee Ainslie (Trades, Portfolio), George Soros (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and Jeff Auxier (Trades, Portfolio). Ray Dalio (Trades, Portfolio), Jim Simons (Trades, Portfolio), Leon Cooperman (Trades, Portfolio) and Caxton Associates (Trades, Portfolio) sold out.
CVS Health
The retail pharmacy company has a market cap of $70.28 billion. Analysts believe the retail pharmacy operator is successful largely because it is vertically integrated with one of the largest pharmacy benefit managers in the U.S.
As a company, it processes more than 1.3 billion prescriptions a year and operates more than 10,000 retail pharmacies across the U.S.
The Peter Lynch chart suggests the stock price is below its fair value, which would indicate a buying opportunity.
GuruFocus' median price-sales chart also suggests the stock is trading below its historical value.
With a 5 out of 5-star business predictability rating, CVS Health has a strong earnings record. The average gain of 5-star stocks is about 12% a year. Revenue and net income has grown steadily over the years as the company has created value for shareholders.
Revenue per share for the company has been steadily rising, a 15-year chart by GuruFocus showed. The company posted revenue per share of $182.26 in the trailing 12 months, compared to $32.89 per share in 2003. EBITDA was reported at $12 billion in the trailing 12 months, compared to $11.8 billion in December 2017.
In profits, the company reported $6.67 billion over the trailing 12 months, compared to $6.62 billion in December 2017.
GuruFocus has identified two severe warning signs with the stock, however. It has seen a decline in gross margins and operating margins. Operating margins were reported at 5.2% in the trailing 12 months, compared to a margin of 5.15% in December 2017 and 5.18% a year prior. It reported a margin of 6.18% in 2015. Gross margins have fallen to 15% compared to 18% in 2013.
It reported long-term debt of $61.55 billion over the trailing 12 months, compared to $22 billion in December 2017. It reported free cash flow of $4.88 billion, compared to $6 billion over the same period.
GuruFocus ranks it 6 out of 10 in financial strength and 8 of 10 in profitability and growth.
More than two dozen gurus hold the stock, including Jerome Dodson (Trades, Portfolio), Andreas Halvorsen (Trades, Portfolio), the T. Rowe Price Equity Income Fund, Dalio, Bill Nygren (Trades, Portfolio), Ken Fisher (Trades, Portfolio), Richard Pzena (Trades, Portfolio), Grantham and Tom Gayner (Trades, Portfolio).
