CVS Health Corp. (NYSE: CVS) received a big vote of confidence from two key executives this month, when company chairman David Dorman and director C. David Brown II purchased $2.1 million worth of CVS shares, at $62 per share.
The insider stock purchase comes at a time when CVS is at something of a crossroads.
Some traders viewed CVS stock with skepticism, especially after Amazon.com ( AMZN) expressed interest in competing with CVS on the prescription drug distribution front. In addition, its upcoming merger with health insurer Aetna ( AET) has fueled uncertainty among investors over the combined company’s profit picture and its intent to freeze dividend payments until the combined company’s debt picture is healthier.
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On the other side of the coin, CVS is widely viewed as a well-run company, with robust earnings and a healthy upside as the baby boomers hit retirement age and hike demand for the products and services that CVS provides.
Is CVS a shot in the arm for your portfolio? Health care stock experts suggest you keep these facts in mind before buying CVS stock.
CVS stock at a glance. Despite languishing at $62 per share in early May, it’s worth noting that the CVS share price has crested $83 per share in each of the past five years and there’s no shortage of analysts who say the same thing can happen in 2018.
An assessment from a group of analysts covering the company pegs CVS’s one-year target estimate at $87 per share. The health care and pharmacy giant saw healthy gains in April after Amazon, Berkshire Hathaway ( BRK.A, BRK.B) and JPMorgan Chase & Co. ( JPM) put off plans to get involved in health care product delivery.
Additionally, CVS hiked its 2017 revenue growth target to 1.5 to 3 percent, up from 0.25 to 2 percent, based on solid first-quarter earnings. The tax reform bill passed by Congress is also lifting CVS’s financial fortunes. Company financial officers say they expect adjusted earnings to rise by 21 percent, thanks to a lower tax burden for the company.
Pros to buying CVS stock. If you believe the merger between CVS and Aetna is a good fit, then CVS could be for you.
“The CVS and Aetna deal signifies the next chapter in the consumerism of health care, taking significant steps toward a single-payer system,” says Grant Geiger, founder and CEO of New York-based EIR Healthcare, a health care technology company. “This is a shot across the bow to health care providers, hospitals and health systems, disrupting the traditional ecosystem.”
The merger reveals the potential power of a combined CVS-Aetna partnership, Geiger says.
“You look at the controlling position companies like CVS Health, who are negotiating drug discounts on the back end, and how that factors into the health care equation,” he says. “Along with the pharmacy benefit managers and payers, CVS has played a role in driving up drug costs to consumers.
“Investors can anticipate that the integration of CVS and Aetna will pose a direct threat to urgent care, minute clinics, independent pharmacies, as well as the outpatient and micro-hospitals we see today,” he says. “Providers will have to stop and think twice about their strategic planning process.”
CVS has popped a few more logs into the fire recently as well.
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“I see a large rise in CVS Health stock on the horizon,” says Kenneth Colon, CEO of Izzy Care, a provider of a next-generation AI-driven, tokenized digital health and wellness platform. “At The Future of Healthcare conference in Las Vegas, we saw Dr. [Troy] Brennan, chief medical officer at CVS, announce how the company plans to leverage the close proximity of CVS retail outlets to consumers, provide data-driven insights for population health, and generate closer collaboration with patient’s existing doctors, to improve outcomes.”
Cons to buying CVS stock. Other Wall Street insiders say that CVS, as it stands right now, could be less than a safe bet for investors.
“I would not be a buyer of CVS — there is too much risk at this point,” says Marc Lichtenfeld, chief income strategist at The Oxford Club. “While it’s a well-managed company and its finances are fine, CVS is not simply the neighborhood drugstore where you go to pick up your prescriptions, some shampoo and maybe a bag of Hershey’s kisses that are on sale near the register.”
Lichtenfeld notes that investors need to weigh the fact that the company is in the process of acquiring Aetna, which is an entirely new business for CVS.
“Additionally, CVS runs one of the largest pharmacy benefits managers (PBM) in the country,” he adds. “PBMs are under increased scrutiny by the government and may become a target in the government’s attempts to lower drug prices.”
Investors need to factor in other warning signs on CVS as well.
“Late-cycle deals of this size are always a concern for acquirers,” says James Stefurak, founder of Monarch Financial Research, in Melbourne, Florida. “The massive borrowing to finance the acquisition could harm CVS shareholders down the road. CVS will likely appease creditors and rating agencies at the expense of shareholder interests.
“I’m also worried CVS will look to dilutive equity offerings for future capital raises,” he says. “At the very least, CVS should de-emphasize shareholder-friendly policies like buybacks and dividend increases.”
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The bottom line. “CVS’s goal is to reinvent health care, Lichtenfeld says, “and it may very well do that. But how the Aetna merger will work out is anyone’s guess. It could go down as a savvy move, as one of the worst deals in recent memory or anything in between.”
“CVS is a good company and the stock is not expensive,” he says. “But the Aetna acquisition and the PBM business make it too risky for me to recommend.”
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Pros and Cons to Buying CVS Health Corp Stock originally appeared on usnews.com
