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CVS Health's Aetna Purchase Is Looking Smarter and Smarter

By Chris Hill – Nov 10, 2019 at 10:20PM

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The insurer was the key source of the combined businesses' higher third-quarter profits.

CVS Health (CVS 0.42%) is a lot more than a pharmacy chain at this point, and it intends to keep increasing its reach. The positive news for investors this week was that third-quarter profits were up 10%, thanks largely to last November's acquisition of health insurer Aetna. But it's what's coming that may be more interesting. In this segment of the Nov. 6 MarketFoolery podcast, host Chris Hill and Motley Fool senior analyst Abi Malin talk about the ongoing integration of the two companies, the recently revealed plan to roll out 1,500 Health Hubs, whether the stock is worth buying at the current premium, and more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

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This video was recorded on Nov. 6, 2019.

Chris Hill: CVS Health, third quarter profits rose 10%. The part of CVS Health that's getting the credit for that is Aetna Insurance. A November 2018 is when CVS Health closed the deal on Aetna. Shares of CVS up a little bit today. This seems like one more brick in the wall of CVS transforming itself from mom and pop drug store to a full-fledged health behemoth.

Abi Malin: If we go back, it was November 2018 that they acquired Aetna. I think that was an interesting acquisition for them. CEO Larry Merlo, he's really begun testing medical services inside the chains, more than 9,900 locations. They have an explicit goal of reducing a patient need for hospital outpatient services. Funneling those Aetna-insured patients to CVS pharmacies and retail clinics. I think healthcare obviously needs an overhaul. So I think it's an interesting strategy. I think it's a powerful cycle that they have going. I just continue to be amazed by this business, actually.

Hill: So, you look at, in the wake of the Aetna acquisition, go back 10 years or so, CVS is starting to introduce these MinuteClinics in some of their locations. Now, they've got this HealthHUB format. They only have it in a few locations. They said they're going to remodel somewhere in the neighborhood of 1,500 locations with this HealthHUB format to offer more health services. It basically sounds like a MinuteClinic on steroids. They're not really disclosing the financials of how these have gone, but I'm assuming they're pretty attractive if they're going from, "We've tested a few" to "We want to roll out 1,500."

Malin: Yeah. I think at the J.P. Morgan Healthcare Conference this year, their CEO made a comment that they have the potential to allocate up to 20% of existing space to healthcare services, offerings, by scaling back on underperforming categories and products while scaling up in new categories, primarily those health services that you were mentioning.

Hill: This is a business that's performing well. When you look at this stock, do you think it looks expensive?

Malin: Good question! I think companies like this demand a premium for a justified reason. This is a very steady business, a pretty predictable business. It continues to gain strength as they go on. That was a very strategic and notably very large acquisition for them that's going well. It's certainly not cheap, but I do think it's a justified premium.

Hill: This also comes on a day when there are reports that Walgreens is considering going private. They're not commenting on it, but there are multiple reports out there that they've been meeting with private equity firms. It's pretty amazing when you think about, even just five years ago, you could look at the basic footprint of the average CVS, the average Walgreens, the average Rite Aid, and you could just say, "They're basically the same." But the divergent paths that the businesses have taken are pretty remarkable. 

Malin: Right, definitely. 

Abi Malin has no position in any of the stocks mentioned. Chris Hill has no position in any of the stocks mentioned. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.

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