Needham Sees A Healthy Risk-Reward For CVS Health

CVS Health Corp CVS's proposed acquisition of health insurer Aetna Inc AET could be seen as a move to better defend itself should Amazon.com, Inc. AMZN flex its muscles and enter the drug space.

The Analyst

Needham's Kevin Caliendo.

The Rating

Caliendo upgraded CVS' stock from Hold to Buy with a newly established $79 price target.

The Thesis

The acquisition of Aetna could generate a "great outcome" even though any deal would likely be dilutive to its earnings in 2019, Caliendo said in a note. Without Aetna under its umbrella, CVS would face heightened competition and margin pressures within both of its businesses. But with Aetna under its control, CVS can leverage its businesses and create a "powerful vertically integrated health care conglomerate" that would save money and generate superior outcomes for consumers.

In fact, Aetna would give CVS the chance to "change the way healthcare is delivered in the US" as it would become an "all-purpose health mart" where consumers can see a doctor, get a test done, pick up an Rx and any wellness item, the analyst wrote.

Under a worst-case scenario in which Amazon's entrance into the market is disruptive and CVS doesn't merge with Aetna, CVS has a downside potential to $59. If Amazon were to come to the market through an acquisition of a small pharmacy benefit manager and CVS doesn't merge with Aetna, then the downside to CVS stock would be to $69.

Price Action

Shares of CVS were trading higher by more than 2 percent Friday morning.

Related Links:

The Health Care Episode: Reviewing Earnings Season And A CVS/Aetna Merger

Amazon Pharmacy Rumors Heating Up Again: Here's What We Know

Image Credit: Ildar Sagdejev (Specious) - Own work, GFDL, via Wikimedia Commons