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. The deal underwent broad scrutiny from regulators. But, fast forward a year, and that deal is finally being approved by the Department of Justice.
DOJ approval means that it is time to take profits on Aetna stock. The stock has been volatile ever since the acquisition was first announced a year ago. Aetna stock initially jumped to nearly $200 by January 2018. Then, market turmoil and regulation fears struck.
Aetna stock dropped to $170 in April. That was the time to buy.
Since, Aetna stock as rallied to $200, and is only a few dollars shy of the $212 proposed takeover price. Thus, upside potential now seems limited. There’s no harm in sticking around for another few bucks, or for a potential CVS stock rally. But, if you bought the dip in April, there’s also no harm in doing some profit taking here and now.
Near Term Upside in Aetna Stock Is Limited
The whole thesis surrounding buying the dip in Aetna stock back in April was that upside potential was huge relative to downside risk.
In the CVS 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. At the time, CVS stock was trading around $70. Thus, the total per share takeover value for Aetna stock was just over $200.
Aetna stock was trading at $170. Likelihood of the deal going through was high, so Aetna stock’s risk-reward profile looked promising with nearly 20% upside to the takeover price.
Now, the story is different. Aetna stock has rallied all the way to $200. CVS stock trades around $80. Thus, the proposed takeover price is about $212. That is just 6% higher than where the stock currently trades. Granted, the deal looks like it will almost inevitably go through at this point in time. But, holding onto shares of AET at this point is a bet on CVS stock holding the $80 level. If it dips in the near term, Aetna’s potential upside dips, too.
Considering the whole market is weak right now and CVS still remains pressured by Amazon (NASDAQ:AMZN) competition, a near term dip isn’t all that unlikely. As such, the safest thing to do here is take profits.
CVS Should Do Well Long Term
Despite near term noise from broader market sentiment, the long term implications of this deal are positive for CVS.
Aetna gives CVS a very potent weapon in the fight against Amazon. Over the next several years, the healthcare and pharmacy worlds will rapidly change like the retail world has rapidly changed over the past several years. In the retail world, there were some victims of the Amazon onslaught. But, there were also some survivors.
The same will be true in the healthcare and pharmacy worlds. Some players will die. Others will survive. With the Aetna deal approved, it looks increasingly likely that CVS will wind up in the survivor box.
Considering CVS stock trades at just 10x forward earnings, this company turning into a survivor has broadly positive implications for the stock price. In a long term window, valuation should normalize and CVS stock should benefit from stable profit growth and healthy multiple expansion.
Bottom Line on AET Stock
CVS is going to acquire to Aetna, and Aetna stock is priced accordingly. As such, I think now is a good time to lock in profits from this M&A rally in Aetna stock.
As of this writing, Luke Lango was long AMZN.