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CVS: Underappreciated and Undervalued

The CVS-Aetna merger deal is significant, creating a powerful new company in the healthcare services company.

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Vishnu Lekraj: Over the last handful of years there has been a major trend within the healthcare services space between the major conglomerates that occupy their supply chain. Currently we have CVS looking to purchase Aetna, and we have Cigna merging with Express Scripts. We believe these two deals are significant and could provide significant returns for investors over the longer term. These key pieces of the healthcare services supply chain will combine into one company that will provide several services on several different fronts from major constituencies within the healthcare space.

Right now, we'd like to highlight the CVS-Aetna merger as being a key piece of the strategy or key piece of this trend. We believe the new company will be a very powerful player as it will combine retail pharmacy, PBM, and health insurance into one company. We believe the invested capital returns will be significantly above the weighted average cost of capital for this company moving forward, and as a result, we believe CVS is underappreciated and undervalued at the moment.

Vishnu Lekraj does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.