Summary
- Judge Leon will decide about the CVS-Aetna merger in July, and there is a lot of uncertainty what will happen if the merger is blocked retroactive.
- At the beginning of June, CVS also held its annual investor day and presented the path back to double-digit growth and debt reduction.
- CVS remains deeply undervalued and the current stock price doesn't seem to match the growth expectations of management as well as analysts.
- This idea was discussed in more depth with members of my private investing community, Moats & Long-Term Investing. Start your free trial today »
About four months ago, I published my last article on CVS Health Corp. (CVS). The stock was trading at a similar level as right now. In the months before, the stock dropped pretty quickly from about $80 to $52 and is since then trading more or less at that level and even positive quarterly results didn't lead to a turnaround in the stock price.
For several months, CVS traded in a very small range between $52 and $57 and impulses to drive the stock price higher again (or maybe even lower) have been missing. Before CVS will report its quarterly results next week (on July 8th) and might get impulses again, that will lead the stock higher or lower, we will take a closer look at the company and the stock.
Larry J. Merlo vs. Richard J. Leon
As I have already written in the last article, I think CVS is severely undervalued. The main reasons for the depressed valuation, in my opinion, are the high levels of uncertainty and the high debt levels CVS has to deal with (among some other aspects).
A big concern right now for CVS is US District Judge Richard Leon in Washington, that must finally authorize the decision under the Tunney Act and the judge signals broad anti-trust concerns. The Justice Department demanded that Aetna already divested its Part D business before approving the merger last year, but there are still concerns that CVS might become too powerful and end up in a position where it can set prices because of missing competition.
CVS Health - along with Express Scripts (NASDAQ:ESRX) and Optum - is controlling 70% of the Medicare prescription drug market nationally, and we, therefore, have three very powerful players in the healthcare sector: Optum is owned by UnitedHealth (UNH) and Express Scripts is owned by Cigna (CI) - two large companies and big players in the United States healthcare market. Currently, there is a huge concern that further concentration might lead to higher prices as well as premiums the customers have to pay. Diana Moss, the president of the American Antitrust Institute, testified that "premiums will increase as a result of consolidation" and expressed concerns about the CVS and Aetna merger. She also advised that it is sometimes most effective to block a merger. Dr. Neeraj Sood, an economist that testified for the American Medical Association also expressed significant competitive concerns as a consequence of the merger. He also explained that there would be far less competition and the pressure - especially on low-income patients - could be immense.
