It’s a tricky time for pharmacy-chain-turned-healthcare-mogul CVS Health (NYSE:CVS), which has its fingers in pretty much every part of the healthcare supply chain. This has created some opportunities for the company that bulls say will carry it higher in the years to come. However, the firm’s metamorphosis into a healthcare goliath came at a hefty price, which has bears worried about CVS stock’s debt load. Shares of CVS have lost more than 20% so far this year, but the question is: can they go up from here?
Here’s a look at the bull and bear cases for CVS Health stock.
Bulls Applaud Acquisitions
Source: Mike Mozart via Flickr
Bulls Point to the synergies that CVS created for itself when it branched out into other areas of the healthcare arena. The firm used a series of acquisitions in order to add private benefits manager (PBM) and private health insurer to its portfolio. Most recently, the company acquired Aetna — a move that many praised as a defensive play to avoid increasing competition from Amazon (NASDAQ:AMZN) and further expand CVS’s reach within the healthcare industry.
In the CVS’ most recent quarterly results, the Aetna purchase appears to be paying off, as revenue for the firm’s health-care benefits segment surpassed expectations at $17.87 billion.
Bears Say Acquisitions Are Expensive
On the flip side, bears are less congratulatory about the Aetna purchase. For one, many analysts say that the $68 billion that CVS paid for Aetna was too steep. Pointing to the firm’s purchase of Omnicare back in 2015, they say this isn’t the first time management has made a bad deal and overestimated how much an acquisition will benefit CVS’ business.
Plus, the Aetna purchase didn’t do much to insulate CVS from the headwinds in the healthcare space. If anything, buying a private insurance business and becoming a one-stop shop for pretty much every healthcare service there is has put CVS stock firmly in the center of the healthcare debate in America.
Bulls Are Confident About the Future
It’s no secret that healthcare is a hot topic in the US, especially come election season. But the bulls look at CVS’ integrated structure as a positive as the space moves forward. By combining a retail pharmacy with a PBM, CVS is ultimately able to lower costs for its clients while still keeping them tied into the CVS network. We have yet to see how the tie-ins with Aetna will play out, but its likely that CVS will use it’s link with Aetna to promote CVS clinics for low-risk issues. Again, this synergy will be beneficial to everyone involved because it will lower costs for insurers and patients while benefiting CVS clinics.
Bears Say Turbulence Ahead
On the other hand, CVS could become a talking point during the 2020 Presidential race as candidates debate how to proceed with healthcare reform in the US. Already the acquisition is being criticized as a way to reduce patients’ choices and reduce transparency within the industry. The firm is almost certain to come up, as the race heats up and candidates debate hot-button issues like drug prices and healthcare reform.
So Which Is It?
No stock comes without risk, but with healthcare so up in the air right now and the political climate becoming increasingly hostile, CVS and its peers are extremely susceptible to volatility. With that said, if you’re a long-term investor it could be a great time to add CVS to your portfolio. Yes, the stock is likely to suffer through some peaks and troughs in 2020 as the presidential race heats up, but, overall, the firm looks like a winner in the healthcare space.
Yes, CVS is carrying a staggering amount of long-term debt following its acquisitions, but the firm should be able to pay that down significantly over the next few years. Having a presence across the board in the healthcare space is going to be a boon for CVS and could help it weather the political storm that’s about to hit.
For that reason, I’m going to agree (albeit cautiously) with the bulls on this one. CVS stock looks like one of the best value plays in the healthcare space right now, so if you can take on a bit of volatility, it’s worth considering.
As of this writing Laura Hoy was long AMZN.
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