- In 2018 CVS purchases Aetna for $78 Billion.
- I previously analyzed the S-4 put out by CVS to see what a combined company would look like.
- The results in the first full year of a combined company were better than expected.
- A good Q1 and lower valuation are good for an investment.
CVS Health Corp. (CVS) is one of the largest integrated healthcare companies in the world. On November 28th, 2018 CVS acquired health insurance company Aetna for $78 Billion creating a company with 9,900 retail locations, 1,100 walk-in medical clinics, a PBM with 105 million member, and 37 million customers of insurance products. With all this CVS Health is trying to offer “total health” by making health care more affordable, accessible, simple, and seamless. Two years ago I published an article exploring the combined company’s financials presented in the S-4. In 2019 CVS Health has mostly completed the merger of each business which this article will explore.
Financials: 10-K Vs. S-4
Everything from the S-4 posted in 2018 is almost spot on to what was posted in fiscal year of 2019. Revenues as projected in the S-4 were $232.722 Billion while the actual results came in at $256.776 Billion, a difference of over 10%. The difference is mostly due to growth within each business since then. As for net income $5.497 Billion was projected in 2018 while in 2019 $6.634 Billion was the actual posted, a slightly better profit margin than projected at 2.58% compared to 2.36%. This slightly higher profit margin is attributable to a higher operating margin of 10 basis points from 9.43% to the actual of 9.53%. With over $500 Million in synergies reportedly created in 2019 and $800-900 Million targeted for 2020 it will be interesting to see the margins once all acquisition costs are realized. On top of this interest expense was not as high as expected coming in at $3.035 Billion compared to $3.463 Billion in the S-4. With so much debt taken on for the acquisition of Aetna it is good to see interest expense come in lower than expected.
As for the financial standing of the business the Q1 balance sheet will be used. In the last quarter CVS Health had a current ratio of 0.99x and a quick ratio of 0.60x. The debt to equity was 2.52x and long term debt was a total of $65.735 Billion. Everything category is better than what was projected prior with the current ratio of 0.89x, quick ratio of 0.59x, and debt to equity at 2.75x. Long term debt as shown on the S-4 was $77.2 Billion and the fact that it is lower is great news for an investor.
Overall, the CVS-Aetna acquisition has turned out well in accordance with financial results. Solid growth in each major segment over the past two years help pushed revenues higher than forecast on the S-4. Net income margin also was improved attributable to slightly lower operating cost, lower interest expenses, and around $500 Million in synergies realized. This has help CVS Health maintain better financial standing with more liquidity and better leverage.
Q1 & Q2 Of 2020
DistilINFO Healthplan Monthly Intelligence Report
Your monthly roundup of the US healthplan industry.
So how is CVS Health doing this year? Well Q1 was quite good revenue and net income growth YOY of 8.3% and 41% respectively. In Q1 revenues increase due to a positive correlation with COVID-19 as the retail/LTC and pharmacy segments were up due to large prescription volume with increasing 90 day orders. The health care benefits segment was also up due to a decrease in discretionary utilization rates. So, will this tailwind stay consistent throughout Q2? In April retail and pharmacy growth was way softer due to the pull through of the longer prescriptions in Q1 as well as lower retail spend due to shutdowns. In May the same trends persisted; therefore it seems Q2 won’t be as great of a quarter as Q1. The shining spot in the next quarter will be the health care benefits segments as the discretionary utilization rate had decreased each month. What I really like about the past year is the increase in mail prescription orders and telemedicine with each increasing 1000% and 600% in usage in Q1. These two services have the potential to lower cost, improve profitability, and connect the health care and pharmacy units more.
CVS Health is currently trading around $63 a share. With an EPS in 2019 of $5.08 the P/E is 12.04x. Along with that CVS Health’s book value per share and sales per share are $50.09 and $196.45 making for a P/BV of 1.26x and P/S of 0.32x. In 2018 before the acquisition I estimated these ratios when CVS was trading at $74 a share and today the company is trading at a better valuation. With good results over the first full year of CVS-Aetna combined the current valuation really solid.
With the purchase of health insurer by CVS in 2018 a company able to provide total health emerged. The first full year of combined company results came in stronger than projected previously. On top of that the financial health of the business is better with more liquidity and less debt. In Q1 the pandemic actually benefited CVS with higher prescription volumes but much of the success in Q1 has taken away from Q2. With a better valuation than before the merger of the two companies and displayed results in 2019 I’m thinking about making an investment.
Source: Seeking Alpha