The healthcare landscape has experienced its fair share of earthquakes lately. Potential mergers, acquisitions, and spinoffs could change the dynamics in a sector that was already changing quickly. One of the most significant potential deals on the table is CVS Health's (CVS 0.99%) proposed acquisition of Aetna (AET).
With the state of flux in healthcare, is CVS Health a smart pick for investors hoping to profit from the upheaval? Or is the pharmacy services giant a stock that investors should avoid in the midst of the uncertainty? Let's look at the arguments both for and against CVS Health.
Why to buy CVS Health
Perhaps the most compelling reason to buy CVS Health stock is that it's cheap and could be poised for a big rebound. The pharmacy services company shed more than 20% of its market cap over the last six months. While that's obviously not good, the decline made CVS Health a candidate for bargain hunters.
The stock now trades at a little over nine times expected earnings. That's cheaper than CVS Health has been in years. Could the stock rebound in a big way? It's entirely possible. A lot of the negativity surrounding CVS Health is associated with the potential Aetna acquisition. But the deal might not be as bad as some expect it will be.
There are several reasons to view a CVS Health-Aetna merger in a positive light. A combination of the two companies would enable CVS Health to diversify, which could be a big plus with Amazon.com (AMZN 0.46%) threatening to enter the pharmacy business. The company could use a growth catalyst, which Aetna would provide. In addition, there are plenty of synergies between the two companies. Now that Walmart could be eyeing an acquisition of Humana, CVS Health's strategy could make even more sense.
It's also important to remember the underlying trends driving growth in the healthcare sector. As baby boomers age, demand for prescription drugs should increase. So should Medicare rolls. The former would benefits CVS Health as the nation's largest pharmacy healthcare provider. The latter should benefit Aetna, which ranks as the No. 3 health insurer in the U.S. and has a large Medicare business.
Income-seeking investors definitely have something to like with CVS Health: its dividend. The dividend yield currently stands at 3.24%. Although CVS Health is stopping its nice dividend increases of the past due to the Aetna deal, there hasn't been any mention of a dividend cut.
Why to stay away
I'd say there are three key reasons to stay away from CVS Health stock. First, the Aetna acquisition could prove to be a disaster. CVS Health added $40 billion in new debt to help fund the purchase of the insurer. There's a real possibility that the company's credit rating could be lowered.
Aside from the potential impact of increased leverage, the integration of the two companies could be more difficult to pull off than CVS Health expects. It could also offer fewer benefits than anticipated.
And combining with Aetna still might not be enough to position CVS Health to fend off a challenge from Amazon. It wasn't a coincidence that an announcement of a partnership between Amazon, Berkshire Hathaway, and JPMorganChase to improve quality and lower costs in healthcare caused the stocks of pharmacy chains like CVS Health and health insurers like Aetna to drop.
Even without the partnership with the other huge companies, Amazon presents a threat that CVS Health can't afford to ignore. Amazon realistically could disrupt the retail pharmacy market and the pharmacy benefits management (PBM) business, too.
Weighing the arguments
I think that whether to buy CVS Health comes down to two variables: Aetna and Amazon. If the Aetna deal works out well, CVS Health stock should bounce back. If Amazon either doesn't enter the retail pharmacy business in a major way or is unsuccessful in its efforts to enter the market, CVS Health is in great shape.
But problems with an acquisition of Aetna could be an anchor on CVS Health for a long time to come. If Amazon captures a significant market share of the retail pharmacy business over the next few years, it could seriously hurt CVS Health.
The challenge, in my view, is that accurately predicting the future isn't easy. I think the Aetna deal could work out, but I'm not totally sure it will. As for Amazon, I suspect the company's chances for success are greater than the odds of it failing in the pharmacy business.
CVS Health really could be a bargain ready to soar. However, there are too many questions that remain unanswered for my liking. For now, I think there are plenty of stocks with better prospects that investors can buy.