CVS Health (CVS 0.53%) has been no stranger to mergers and acquisitions. The company is always on the lookout for opportunities to get bigger and more diverse. One of the areas it has focused on is becoming a broader healthcare business; last year, it announced plans to acquire home health company Signify Health. But another area that has been on its radar for some time is primary care.
This month, the company finally announced an acquisition target there as well: Oak Street Health (OSH +0.00%). At around $10.6 billion, it's a significant purchase for CVS -- but will it make the stock a better buy?
Why it could be a good move for the business
By diversifying into primary care, CVS believes it can lower medical costs for its customers while providing them with a better, more comprehensive experience. Oak Street Health has a presence in 21 states with 169 medical centers. It also employs close to 600 primary-care providers. Oak Street CEO Mike Pykosz believes that the transaction can help accelerate the company's growth: "Together with CVS Health, we will have access to greater resources and capabilities to expand the reach of our platform." Oak Street has already been a relatively fast-growing business all on its own, reporting $1.4 billion in revenue for 2021, which was a 62% increase from the previous year.
NYSE: OSH
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If nothing else, the transaction may simply help CVS keep up with its rivals. Pharmacy retailer Walgreens Boots Alliance invested $5.2 billion into primary-care company VillageMD in 2021, and last year added another $3.5 billion to help fund its acquisition of Summit Health-CityMD. There's also looming competition from tech giant Amazon, which not only was interested in acquiring Signify Health but also announced last year that it was buying 1Life Healthcare, a primary-care operator better known as One Medical.
At a price-to-sales ratio of 4, Oak Street is trading somewhat higher than One Medical, so it appears that CVS paid a bit of a premium for the business.
NYSE: CVS
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Why it may be a risky move for CVS
Diversification can make a business less dependent on its core operations, and thus make it a bit of a safer investment overall. But Oak Street's business isn't profitable, incurring losses of $515 million over the past four quarters. And it isn't generating positive cash flow from its day-to-day operations, burning through $285 million in the trailing 12 months.
The risk for investors here is that CVS may be taking on too much in too short of a time frame. Its deal to acquire another unprofitable company in Signify Health isn't over yet (that's expected to complete in the first half of this year), and throwing another acquisition into the mix could put a further strain on its bottom line, especially if it plans to expand the businesses down the road.
But here's some good news: The healthcare company is forecasting that its diluted earnings per share will be between $7.73 and $7.93 this year. That's well above the $2.42 per share it pays in dividends over the course of a full year, leaving room for it to continue to reinvest into its operations.
Should you buy CVS stock?
CVS is trading at only 10 times its future earnings (based on analyst expectations), which is well below the healthcare sector average of 17. Not only is the stock attractively valued, but it isn't far from its 52-week low of $84.60. It also pays a dividend that now yields 2.7% (better than the S&P 500 average of 1.6%). There is some risk that these acquisitions could weigh down CVS' business, but the company has experience with even larger acquisitions, having purchased health insurer Aetna in 2018 for $69 billion.
CVS is shaping up to be one of the largest, most diversified healthcare companies you can invest in. And with a low valuation and relatively high dividend, it's a stock that investors should consider buying today.
