Aetna Inc (AET) Slims and Trims Before Marriage to CVS

In some regards, Tuesday morning’s quarterly report from Aetna Inc (NYSE:AET) doesn’t really mean much to owners of AET stock. Back in January, the company agreed to be acquired by drugstore chain CVS Health Corp (NYSE:CVS), and that deal is expected to be consummated in the latter half of this year. Barring any unexpected twists in the meantime, the value of the mostly cash deal will only change in step with ebbs and flows in the value of CVS.

aetnaOn the other hand, if only to understand exactly what CVS is getting itself into (and maybe on the off chance something scuttles the merger), the market is keeping tabs on Aetna’s final performance as a stand-alone company.

To that end, there’s comfort in the fact that the first-quarter report was more or less what it was expected to be.

Aetna Earnings Recap

For the quarter ending in March, Aetna reported an operating profit of $3.19 per share on sales of $15.34 billion, versus analyst expectations for revenue of $15.35 billion and a per-share profit of $2.97. The insurer earned $2.71 per share of AET stock on sales of $15.17 billion for the same quarter a year earlier. Collected premiums fell from $13.76 billion to $13.07 billion, though fee revenue grew from $1.48 billion to $2.06 billion. Adjusted income grew from 6.1% of revenue in the first quarter of 2017 to 6.8% this time around.

CFO Shawn Guertin said of the company’s first-quarter numbers:

“Our first quarter operating results were largely in line with our expectations as favorable prior years’ reserve development more than offset higher than projected flu related medical costs. Our operating results continue to be supported by a solid balance sheet and strong cash flow and adjusted margins.”

Margins were given a boost in part due to the company’s exit of ACA-compliant markets, allowing the insurer’s medical loss ratio to improve from 82.5% to 80.4% year over year. That improvement might have been even bigger, too, had the 2018 flu season not been worse than usual.

The company’s total expense ratio fell from 25.4% to 18.2%, though most of that improvement stemmed from expenses relating to the blocked effort to acquire rival Humana Inc (NYSE:HUM). Adjusting for that one-time expense, Aetna’s expense ratio edged up from 16.0% to 17.9%, mostly due to the reinstatement of the health insurer fee.

While total enrollments in Aetna plans fell about 2%, largely because the insurer dropped its Obamacare plans, it was able to offset that lost business by adding 250,000 Medicare Advantage enrollees. All told, it’s now got 1.7 million Medicare Advantage members, which is a much more profitable business line for Aetna than Obamacare policies were.

Looking Ahead for AET Stock

With the CVS deal looming, the company is no longer providing guidance for AET stock owners; it’s not even hosting conference calls to deliver any added details to its quarterly numbers.

Analysts are still making calls, though, and they’re calling for a profit of $3.37 per share of AET stock on revenue of $15.62 billion for the quarter currently underway. The bottom line would be worse than the $3.42 per share earned in the second quarter of 2017, when it produced $15.52 billion in sales.

On a full year basis – were the company going to be able to complete the full year – the pros are modeling earnings of $10.96 per share of AET stock versus 2017’s bottom line of $9.86, while the projected 2018 revenue of $61.47 billion would be a slight improvement on 2017’s top line of $60.53 billion.

It’s an outlook that means little at this point.

With that as the backdrop, there’s no particular reason to bother buying AET stock now, not because it’s a bad company, but because each share of Aetna stock is soon going to be replaced by $145 in cash and $62 worth of CVS stock. If only to avoid fees charged by brokerage firms to make the swap, it would be more cost effective for interested parties to simply buy CVS shares and not keep capital tied up for an undetermined amount of time.

That might also be a good reason for current shareholders to sell their AET stock now rather than wait for the deal to be finalized. Aetna shares are still at relatively high levels, and a bird in hand…

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.

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