CVS (NYSE:CVS) has a deal in place to acquire Aetna. That will transform the company but it has yet to receive final regulatory approval. Whether that deal gets approved has cast a shadow over its 2019 prospects. That's largely because the deal marks a major change for the company as it moves into a new space -- insurance -- that's a changing market.
A full transcript follows the video.
This video was recorded on Feb. 26, 2019.
Shannon Jones: I think there's a lot to watch here. Again, to your point, there are a lot of question marks, too. Another one that is still overhanging the company right now is just being able to finally close this Aetna deal. We found out just this week, the Department of Justice has formally asked a judge to finally put the stamp of approval on the CVS-Aetna merger. There's about a 50/50 shot, at least according to some analysts, as to whether or not they'll get this final approval. It sounds like the district court judge has been very adamant about saying they should have actually gotten consent before moving forward with integrating and closing the deal, which they actually did. That's one question mark.
The other question mark that I think a lot of investors, particularly this last quarter, have been scratching their heads about, is earnings. High level, looking at their earnings, we saw mixed results. Net sales did rise 12% to $54.4 billion, just slightly below where analysts were expecting at $54.5 billion. Not a big difference. We did see same-store sales increase 7%, really driven by the retail pharmacy locations and some modest growth in their PBM business. But I think, Dan, the big overhang for this company was actually in their long-term care business. This is where they're providing services to a lot of the skilled nursing facilities, which we've talked about it on the Healthcare show with a lot of these REITs. These healthcare REITs have really been hammered over the past few years with these long-term care facilities. We're seeing that happen, and it's been taking place throughout 2018 for CVS. That was a pretty big overhang.
They actually reported a net loss of $421 million in this last quarter. On an adjusted basis, CVS came out to $2.14 per share, above where it was expected. But I think for 2019, this is still very much a transition story.
Dan Kline: Assuming the merger gets approved, there's a lot of questions. This isn't CVS buys 1,000 Walgreens stores and now calls them CVS. This is two adjacent but completely different businesses. How are you going to integrate the insurance model and CVS? Obviously, wellness should impact insurance rates. There's an area where you could see. But it's something a lot of companies have tried to do and it's not a simple one. This isn't your typical merger, where you can say, "Let's get rid of all this back-end functionality." Accounting for an insurance company and accounting for CVS are different. There's not going to be necessarily some of the synergies you easily get. They're going to have to kind of drag people kicking and screaming as they do some of this because they're going to be transforming what Aetna is at a time when the country hasn't really figured out how healthcare and health insurance works.
Jones: I totally agree, Dan! A lot of question marks. Right now, the stock is trading at a P/E ratio of about 9X. Dividend yield of about 3%. What do you say to the investor who's just sitting on the sidelines? Is now the time to get in?
Kline: No. Stay on the sidelines. I'm not nervous about the success of this company, but the merger and whether they five years from now spin it back off and decided didn't work doesn't necessarily depend on them. We have an election coming up in 2020 that may very well change our national attitude on healthcare and how it's provided. You own an insurance company, we have a major change in how insurance is provided, that's going to impact you. There's things out of CVS' control. They're smart to be moving into the wellness space. But, we've talked about this before. If you're going to go on a diet, would you go to the CVS Diet Club or would you just go to Weight Watchers, or WW as they call themselves now?
Jones: Probably WW.
Kline: Yeah! They're going into a lot of areas where, alright, I might take a casual yoga class at a CVS, but how are they going to work that out? I'm trying to meditate, and the person over at the counter is loudly complaining that their prescription is too expensive? If you've lived in Florida, you've heard that every time you've ever been in a CVS. There's a lot of issues to figure out.
And, as a consumer, I don't want to suggest anything nefarious, but CVS does better if I'm not well. So, when you put your hand in the new CVS medical diagnostic tool, do you trust 100% that CVS is going to not tell you, "Maybe you need a little blood pressure medicine! Maybe you should talk to your doctor about Zelnorm!"
Whatever it is, I think they have a lot of barriers. I'm not saying they won't get there, but I would wait if I was an investor.
Jones: Fair, fair warning there! I agree for the most part. I think long-term, this is a very interesting company. They are going through a massive transition in terms of who they are, but I do like that they are trying to get ahead of Amazon. And really, we could probably call this show "how to get ahead of Amazon." [laughs] I do like what I see. But all in all, I think there are a lot of pink flags there that investors will need to keep an eye on.