The U.S. healthcare industry is in the middle of an upheaval. Lines between health insurers, pharmacies, and pharmacy benefits managers (PBMs) are becoming increasingly blurred. There are probably no better examples of this than CVS Health Corporation (CVS -1.58%) and Express Scripts (ESRX).

CVS Health ranks as the largest pharmacy chain and the second-largest PBM in the U.S. In December, the company announced plans to merge with Aetna (AET), the No. 3 health insurer in the country. Express Scripts is the biggest PBM. In March, Cigna (CI), the fifth-largest health insurer in the U.S., announced that it was acquiring Express Scripts.

Which stock is the better choice for investors now between CVS Health and Express Scripts? It's complicated.

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Image source: Getty Images.

The case for CVS Health

Many investors are skeptical about CVS Health's planned acquisition of Aetna. The deal means that CVS Health will accumulate a lot of additional debt. The company's steady dividend increases of the past few years ground to a halt. There's no guarantee that integration of the two organizations will go smoothly.

However, one of the most significant challenges with the U.S. healthcare system is that it's so fragmented. A combination of a large pharmacy chain, PBM, and health insurer -- in addition to CVS Health's MinuteClinic walk-in clinics that are in many of its pharmacy stores -- could be just what's needed.

CVS Health CEO Larry Merlo thinks the merger with Aetna will enable the resulting entity "to remake the consumer healthcare experience." It's quite possible that CVS Health will be able to introduce innovative new products that manage chronic care more effectively once the deal is finalized. That could lead to nice revenue and earnings growth over the long run.

But will the deal actually go through? That remains to be seen. The U.S. Department of Justice is closely scrutinizing the proposed merger of the two companies.

One key reason for investors to consider buying CVS Health is that the stock trades for less than 10 times expected earnings. A combination with Aetna would increase the resulting entity's valuation somewhat, though, since Aetna's share price is currently 14.5 times expected earnings.

And while CVS Health's dividend hikes of the past are at least temporarily on hold, investors should still like the yield of more than 3%. The company should be able to sustain payment of its dividend at current levels even with the assumption of additional debt to fund the Aetna acquisition.

The case for Express Scripts

Why think about buying Express Scripts? For one thing, the stock should move higher if Cigna is allowed to buy the big PBM.

Cigna offered a cash and stock transaction valued at roughly $54 billion plus assumption of Express Scripts' debt of around $15 billion. Express Scripts' current market cap stands around $41 billion. If the deal goes through, investors buying Express Scripts now would see a return of over 30% by the end of 2018.

It's important to note, though, that the market appears to think the acquisition could be blocked by regulators. While Express Scripts jumped immediately following the announcement of a potential buyout by Cigna, shares fell soon afterward. Express Scripts stock price is now close to its level prior to when news broke about the acquisition. Cigna however, said in a statement this week that it is "optimistic in our ability to obtain regulatory approval."

Still, investors need to consider the case for Express Scripts if the Cigna deal doesn't happen. The good news for Express Scripts is that it remains the No. 1 PBM in the U.S. at a time when controlling prescription drug costs is as important as ever. As baby boomers age, they are likely to require more prescription drugs, a trend that should benefit Express Scripts.

However, there's also bad news for Express Scripts. The company's revenue declined a little in 2017 compared to the prior year. Earnings were higher year over year, but the increase was primarily due to a larger tax hit in 2016. 

The worst news for Express Scripts is that its contract with Anthem expires at the end of 2019 -- and Anthem doesn't intend to renew the agreement. The insurer is Express Scripts' largest customer, contributing 19% of the PBM's total revenue last year. Changing dynamics in the healthcare landscape could make it difficult for Express Scripts to make up for the loss of the Anthem revenue. 

Express Scripts stock is cheap right now, with shares trading at a little more than seven times expected earnings. However, that low valuation reflects the challenges that the PBM faces over the next few years.

Better buy

If neither of these two companies' deals actually happen, I think CVS Health is better positioned for the long run. However, if Cigna's acquisition of Express Scripts wins approval by regulators, Express Scripts will enjoy a much bigger boost in its stock price than CVS Health will. On the other hand, if CVS Health's merger with Aetna closes but Cigna doesn't buy Express Scripts, my winner between the two is again CVS Health. Clear as mud, right?

My guess -- and it's only a guess -- is that both deals will secure approval. They're both different scenarios than a combination of two companies in the exact same line of business. If I'm right, Express Scripts is the better stock to buy right now, even though I think CVS Health has the better long-term prospects.

However, I'm not certain the Cigna buyout of Express Scripts will actually go through. As a result, I'm not calling Express Scripts as a stock to buy right now. Like I said earlier, it's complicated.