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Aetna Inc Stock Is Low-Risk, Big-Reward at Current Levels

Aetna stock - Aetna Inc Stock Is Low-Risk, Big-Reward at Current Levels

Source: Montgomery County Planning Commission via Flickr (Modified)

In late October 2017, U.S. drugstore operator CVS Health Corp (NYSE:CVS) announced intentions to acquire U.S. health insurer Aetna Inc (NYSE:AET) in a $69 billion dollar deal that promised to permanently alter the healthcare industry. Aetna stock jumped on the news.

From $160 to $180. That move made sense. In the deal, AET shareholders were to be given $145 per share in cash plus 0.8378 shares of CVS for each share of AET they owned. With CVS stock trading around $70, that equated to a total per share takeover value of just over $200.

Indeed, Aetna stock traveled all the way to near $200 in late January 2018.

But then broader market turmoil struck. Inflation risks hit the market. Trade war risks hit the market. Regulation risks hit the market. One after the other, risks kept hitting the market, and the market kept falling.

Same with Aetna stock. But down here at $170 and change, Aetna looks like a bargain considering the M&A catalyst. If the deal falls through, downside risk is greatly mitigated by an already cheap valuation. If the deal goes through, upside potential is sizable.

As such, AET stock looks attractive here and now.

Here’s a deeper look:

Upside Potential Is Large and Likely

In the event that the deal passes, buyers of Aetna stock here could be rewarded with 10-15% upside in a hurry.

CVS stock currently trades around $67. Thus, AET shareholders would get $145 in cash plus roughly $56 in CVS stock for each share of AET. That equates to just over $200 for each share of AET.

AET stock currently trades at $177, about 13% lower than the current takeover price of $200.

Moreover, the deal would likely close quite soon considering it has been on the table since last October. Therefore, the 13% upside could be realized in a hurry.

It is also likely that this deal goes through. The whole healthcare industry is consolidating to lower costs and fight off competition from pioneering technology firms, like Amazon.com, Inc. (NASDAQ:AMZN). This is but one deal of many in the healthcare industry, the sum of which should lower healthcare costs by reducing competition and leveraging synergies.

There doesn’t seem to be anything wrong with that.

All in all, it is likely that AET stock rallies 10% to 15% from current levels in a hurry.

Downside Risk Is Limited

Even if the deal doesn’t go through, Aetna stock won’t fall by that much.

Before the deal was announced, Aetna stock was trading around $160. Since then, the S&P 500 has risen roughly 3.4%. Meanwhile, peers UnitedHealth Group Inc (NYSE:UNH) and Anthem Inc (NYSE:ANTM) have rallied between 10-13%.

Other peers CIGNA Corporation (NYSE:CIG) and Humana Inc (NYSE:HUM) have had wildly different moves (CIG is down 12%, while HUM is up 19%), but those wild moves have to do with one-off M&A activity.

Thus, by and large, healthcare provider stocks have rallied at least 10% since the CVS-Aetna deal was announced. Applying that same gain to Aetna stock implies a current price for AET of $176, just a buck below where the stock is currently trading.

Moreover, the numbers at AET have been quite good (the company beat on both top and bottom line expectations last quarter), and earnings estimate have trended higher over the past several months. Earnings estimates for this year currently sit at $11 per share. A market-average 16-times forward multiple on those $11 earnings implies a present value of $176.

Thus, both peer stock performance and fundamentals imply that AET stock is worth around $176, without the M&A catalyst.

Bottom Line on Aetna Stock

If the deal goes through, Aetna stock could rally 10-15% over the next several months. If the deal doesn’t go through, Aetna stock might drop a few percent, if that, at most.

Therefore, the risk-reward profile on Aetna stock at current levels skews towards the upside. That makes AET stock an attractive asset to own for the next several months.

As of this writing, Luke Lango was long AMZN. 

Article printed from InvestorPlace Media, https://investorplace.com/2018/04/aetna-stock-big-reward/.

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