CVS - CVS Health Corporation

[rb]

Don't know if this helps.

 

https://www.bloomberg.com/news/articles/2017-10-26/here-s-what-ceos-are-saying-about-amazon-s-plans-for-domination

[KCLarkin]

Now CVS is allegedly in talks to buy Aetna:

https://www.wsj.com/articles/cvs-health-is-in-talks-to-buy-aetna-sources-1509047642

 

Exciting day.

 

 

 

[DooDiligence]

Now CVS is allegedly in talks to buy Aetna:

https://www.wsj.com/articles/cvs-health-is-in-talks-to-buy-aetna-sources-1509047642

 

Exciting day.

 

Any ideas on how they'll finance this?

Seems like debt would be the way to go (exchanging shares would be stupid.)

 

CVS would be a powerhouse if this passes muster.

 

Might be cool if they started removing grocery items & expanded the Minute Clinics.

 

Oh God, I hope they don't start offering dialysis.

[Spekulatius]

Now CVS is allegedly in talks to buy Aetna:

https://www.wsj.com/articles/cvs-health-is-in-talks-to-buy-aetna-sources-1509047642

 

Exciting day.

 

I hope that this rumoutpr is not true. The combination of a pharmacy with a health insurer makes no sense to me, and CVS can’t really afford this either, they would need to issue a lot of stock to do it.

 

Stupid mergers often occur a the end of bull markets.

[dwy000]

Now CVS is allegedly in talks to buy Aetna:

https://www.wsj.com/articles/cvs-health-is-in-talks-to-buy-aetna-sources-1509047642

 

Exciting day.

 

I hope that this rumoutpr is not true. The combination of a pharmacy with a health insurer makes no sense to me, and CVS can’t really afford this either, they would need to issue a lot of stock to do it.

 

Stupid mergers often occur a the end of bull markets.

 

Combination of PBM and health insurer is an increasing phenomenon.  OptumRx is the the 3rd largest PBM.  Anthem just announced they are creating their own PBM.  CVS's performance based pharmacy network announced earlier this week is along the same trend, combining $ with outcomes as industry moves to value based care.

[Spekulatius]

I don't know. I had a starter position in CVS that I sold today. When I hear words like " strategic merger" I suspect that shareholders money will be burned by the boatload.

[DooDiligence]

I don't know. I had a starter position in CVS that I sold today. When I hear words like " strategic merger" I suspect that shareholders money will be burned by the boatload.

 

You could very well be right.

 

The more I read, the more I kinda don't like it.

 

http://www.latimes.com/business/hiltzik/la-fi-hiltzik-aetna-merger-20170214-story.html

 

*edit - Attempts at consolidation of payers through M&A have failed to pass government muster.

Now CVS takes a shot at it from a different angle. - end edit*

 

If only payers were cheaper.

 

Not adding 2 CVS here but not selling what little I have (pensive...)

[rogermunibond]

Going full stack as they say in tech.

 

Payer

PBM

Retail pharma

Add Primary Care/Minute Clinic expansion

Add hospital care

Add specialty physicians (radiology, ortho, etc)

 

 

[KCLarkin]

I don't know. I had a starter position in CVS that I sold today. When I hear words like " strategic merger" I suspect that shareholders money will be burned by the boatload.

 

The Caremark merger paid off. And so did OptumRX.

 

But I am inclined to agree. The relatively equal sizes of these two goliaths make me queasy. Tempted to split this bet between CVS and WBA.

[HalfMeasure]

I don't know. I had a starter position in CVS that I sold today. When I hear words like " strategic merger" I suspect that shareholders money will be burned by the boatload.

 

The Caremark merger paid off. And so did OptumRX.

 

But I am inclined to agree. The relatively equal sizes of these two goliaths make me queasy. Tempted to split this bet between CVS and WBA.

 

It's also harder to make the logic work when they're going to be using a good amount of CVS stock @ 7-8x EBITDA to acquire @ 12x - albeit different businesses but the dynamic would be different if either they were in a position to use all cash/debt or issue stock at a premium to the target. I can wrap my head around the business logic but not necessarily the financial logic.

[DooDiligence]

$60B+ would build an expensive but ginormous moat.

(no more $4B a year in buybacks? booo...)

 

United Health & Walgreen should be quaking in their boots.

 

That said, I don't like Aetna management at all.

(are all these guys such dicks?)

[Spekulatius]

The CVS &  Aetna merger sounds more likes what Citicorp did in the 90’s, when they became a financial supermarket they was mediocre and worse at everything. Honest, I think these type of mergers is what you see at the end of bull markets.

 

I don’t get the logic in combining CVS with an insurance company. Sure there is some overlap with drugs, but that could have been done in a more straightforward manner.

 

Those things like urgent care clinics (what is stopping CVS from getting into this business right now? This probably stuff that investment bankers make up to justify the merger.

 

The whole thing will leave an unwieldy organization that is potentially over leveraged (if they use debt) and now will have to compete nevertheless in retail and drug distribution with deep pocketed AMZN. I don’t see this merger, which distracts more from the business than it helps with synergies helping to compete with AMZN at all. What they will do is pissing off a lot of their customers that they now compete with.

 

Instead of shaking in their boots, Walgreen with rub their hands and figure out how to catch some of this free fallout from insurance  and retail  customers that  don’t like dealing with a company that now competes with them.

[DooDiligence]

Thought provoking thread

 

https://forums.studentdoctor.net/threads/cvs-caremark-and-aetna-misled-medicare-part-d-patients-about-in-network-pharmacies.1115224/

[frommi]

1.) Merger is far from done

2.) Amazon is not a real threat

3.) Profits are still growing

4.) Stock is unbelievable cheap when you look at FCF/Price (13% Yield) or FCF/EV (10% Yield). That normally only happens when fcf or earnings are falling off a cliff, but i don`t see this here. Based on this the stock is even cheaper than in 2008.

Especially when you look at:

5.) Average tax rate 38.4%.

 

Most analysts see some good reasons for the merger, its possible that this gets the stock off the Amazon fear list.

Maybe the market focuses on the numbers again after the next earnings. WBA`s earnings weren`t that bad, so i don`t think its unreasonable to see stable or even growing FCF from last quarter.

[Spekulatius]

1.) Merger is far from done

2.) Amazon is not a real threat

3.) Profits are still growing

4.) Stock is unbelievable cheap when you look at FCF/Price (13% Yield) or FCF/EV (10% Yield). That normally only happens when fcf or earnings are falling off a cliff, but i don`t see this here. Based on this the stock is even cheaper than in 2008.

Especially when you look at:

5.) Average tax rate 38.4%.

 

Most analysts see some good reasons for the merger, its possible that this gets the stock off the Amazon fear list.

Maybe the market focuses on the numbers again after the next earnings. WBA`s earnings weren`t that bad, so i don`t think its unreasonable to see stable or even growing FCF from last quarter.

 

I don’t think the FCF yield is that high, so come of the “FCF” in the first half of 2017 came from working capital management. CVS has done a good job managing their inventory levels, especially considering the growth in the business (which came mainly from pharmacy).

 

in 2016, they had roughly $2.6B in depreciation and amortization and $2.3B in Capes. Assuming that sustainable, their FCF is only a bit higher than their net income, but not much.

 

I do agree that lowering their tax rate would create a nice windfall, but they is not easy to do with a local operation as they age to pay state income taxes etc. for the operation in a particular state. Trumpf tax plan does nothing to reduce those local taxes.

[DooDiligence]

Who gets hit with termination fees? (will Aetna be stupid enuf to do a Humana repeat?)

I understand the reasoning (eliminate competitive bids but...)

 

on another note, this was kinda funny:

 

https://jackpineradicals.com/boards/topic/head-of-health-insurance-giant-aetna-slams-sanderss-single-payer-plan-as-lous/

[DooDiligence]

Decent piece by Morningstar

CVS_Bid_for_Aetna_Followed_a_Long_Hunt.pdf

[Spekulatius]

I am not denying the need for more integration in health care. A one stop shop exist already it is a non-profit called Kaiser. I had it once for a couple of year and loved it as a customer. it wasn’t cheaper than more traditional PPO’s but certainly more conventions for the customers.

 

However when it comes to investing and commercial mergers, the outcome and success is highly path dependent and ai think CVS will have a hard to to manover through the upheaval and make it rewarding for shareholders, consideringh the price they are likely to pay.

It does not  resolve them from having to compete with AMZN either and often one stop shop get beaten by a focused competitor who has limited offering , but does what they do offer really well.

 

[DooDiligence]

https://www.marketwatch.com/story/cvs-aetna-bonds-clobbered-by-takeover-report-2017-10-27

 

Who are they gonna get financing from JPM?

 

It just looks so tenuous, expensive & dilutive.

 

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OTOH I really like the idea of a Minute Clinic expansion (wouldn't need to own Aetna to do it though.)

 

Talked to the manager & pharmacist at the CVS down the road from me:

 

I said "I'll bet all this food & seasonal stuff is less than 20% of revs for you guys"

the manager said "a lot less."

 

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I think they stopped selling cigs because doctors offices don't sell cigs.

 

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I kinda hope the Aetna thing doesn't go through (at this price...)

[DooDiligence]

IF this winds up happening, will UNH or another make a bid for WBA?

 

Then we might see WBA drop cigs & start chasing CVS?

 

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So far, there's no formal offer.

Will one be announced at the upcoming earnings call?

 

Or will the rumor die & Jim Chanos start shorting the crap out of Aetna for some crazy reason.

 

That'd be sweet!

[KCLarkin]

However when it comes to investing and commercial mergers, the outcome and success is highly path dependent and ai think CVS will have a hard to to manover through the upheaval and make it rewarding for shareholders, consideringh the price they are likely to pay.

It does not  resolve them from having to compete with AMZN either and often one stop shop get beaten by a focused competitor who has limited offering , but does what they do offer really well.

 

Yes, this is a disaster. Best case scenario, they are right and in a few years (3-5) their market position will be even stronger than it is today. But for the next 3 years, it just adds another overhang to the stock. The story has changed and I need to get out of my position. But the stock is so damned cheap, it is tempting to hold on a bit longer.

[KCLarkin]

I sold my CVS position today. The potential CVS-Aetna merger would completely destroy my thesis. I don't like to buy or sell on rumours but there is enough smoke to convince me that the CVS board is at least considering this deal. I consider CVS un-investable until there is more clarity. (which is a clear buy signal)

 

Walgreens is getting cheap, so I may shift funds over there.

[DooDiligence]

http://www.reuters.com/article/us-cvs-health-m-a-mckesson/drug-distributor-mckesson-to-buy-cvs-healths-services-unit-idUSKBN1D62RB

[KCLarkin]

I sold my CVS position today. The potential CVS-Aetna merger would completely destroy my thesis. I don't like to buy or sell on rumours but there is enough smoke to convince me that the CVS board is at least considering this deal. I consider CVS un-investable until there is more clarity. (which is a clear buy signal)

 

Walgreens is getting cheap, so I may shift funds over there.

 

I'm back in, albeit at a smaller position size. The Aetna deal is less dilutive to equity than I expected. CVS shareholders will retain most of the risk and benefits from this deal. Obviously, this means that CVS is adding an enormous amount of debt (4.6x proforma EBITDA). But they will halt buybacks and dividend increases, so CVS should get debt to a manageable level quickly.

http://investors.cvshealth.com/~/media/Files/C/CVS-IR-v3/AET%20transaction/Copy%20of%20CVS%20Health%20%20Aetna%20Announcement%2012-3-17%20FINAL.pdf

 

This deal will make stock difficult to own for the next 2-3 years. But after that, it should create significant value. I would prefer to own standalone CVS but still prefer CVS-Aetna over Walgreen's.

 

 

 

[frommi]

I sold my CVS position today. The potential CVS-Aetna merger would completely destroy my thesis. I don't like to buy or sell on rumours but there is enough smoke to convince me that the CVS board is at least considering this deal. I consider CVS un-investable until there is more clarity. (which is a clear buy signal)

 

Walgreens is getting cheap, so I may shift funds over there.

 

I'm back in, albeit at a smaller position size. The Aetna deal is less dilutive to equity than I expected. CVS shareholders will retain most of the risk and benefits from this deal. Obviously, this means that CVS is adding an enormous amount of debt (4.6x proforma EBITDA). But they will halt buybacks and dividend increases, so CVS should get debt to a manageable level quickly.

http://investors.cvshealth.com/~/media/Files/C/CVS-IR-v3/AET%20transaction/Copy%20of%20CVS%20Health%20%20Aetna%20Announcement%2012-3-17%20FINAL.pdf

 

This deal will make stock difficult to own for the next 2-3 years. But after that, it should create significant value. I would prefer to own standalone CVS but still prefer CVS-Aetna over Walgreen's.

 

I did the opposite, there will be a lot of short term pressure from arbitrage plays and the numbers are worse then i expected. I have fair value around 78$ if everything goes according to plan, but since they are levered at 5x EBITDA after the merger, the margin of safety was too small for me. At least i made a little profit over the last 4 weeks. Around 60$ the risk/reward is acceptable to me.