Aetna Acquisition Puts CVS Growth Prospects Back In Good Health

CVS Health Corp CVS's proposed acquisition of Aetna Inc AET is reason enough for at least one Wall Street analyst to turn bullish.

The Analyst

Morgan Stanley's Ricky Goldwasser upgraded CVS' stock from Equal-weight to Overweight with a price target boosted from $81 to $88.

The Thesis

CVS' proposed acquisition of Aetna will create a "two-phase trajectory" on CVS' business, Goldwasser said in a note: The merger will accelerate CVS' EBIT growth profile and will create an entirely new healthcare delivery model.

The first phase should take place in 2019 to 2020 and will combine Aetna's memberships with CVS pharmacy programs (narrow networks, Medicare Part D, clinical programs, etc), Goldwasser said. From this, CVS will be able to generate cost synergies that will accelerate its operating profit growth.

The second phase will start in 2021 and will see CVS "reshaping access to healthcare," Goldwasser said. The company will be able to leverage its existing real estate portfolio to create new "healthcare hubs" which will create even more synergies.

There is more to the bullish case for owning CVS' stock, the analyst added. A combined CVS-Aetna entity will see its tax rate fall from approximately 39 percent in 2017 to 27 percent due to the recently passed corporate tax reform. This represents a $1.5 to $1.8 billion tax benefit, which can be allocated to debt repayment, strategic investments to support the merger, price concessions, or support CVS' ongoing share repurchase program.

Price Action

Shares of CVS were trading higher by 1.7 percent at $76.40 Friday morning.

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