Our valuation of CVS shows that it is significantly undervalued on its own while AET is somewhat overvalued. The question then is whether it would still be attractive after the acquisition is completed.
As shown in the lower left graph below, CVS has been valued consistently between 75% and 125% of the market’s Payback over the last two decades. At $70, the stock is undervalued by 71% (VR) assuming estimated EPS of $6.42 for 2018. The calculated range is shown in the lower right graph compared to the actual high, low and close.
The fact that it is undervalued is due both the uncertainty of Amazon’s interest in healthcare services as well as CVS’ role as acquirer.
By the same analysis, Aetna ($178) is only modestly overvalued by 12% (VR). This is a small premium for a takeover target but not uncommon.
The next question is what would be the merged company’s Valuation Return, or Risk (VR).
By adding the VR adjusted Market Caps of each company we get an Adjusted Market Cap total which is 34% higher than the current Market Cap of CVS and AET combined.
|SHARES O/S (M)||PRICE||MKT CAP (M)||VR||ADJ MKT CAP||
|CVS||1,005||$70||$ 70,350||+71%||$ 120,299|
|AET||325||$178||$ 57,850||-12%||$ 50,908|
|TOTAL||$ 128,200||$ 171,207||+34%|
If the acquisition price of $207 is used, the NET VR is reduced to +24%, still an attractive value.
(c) 2018 Robert L. Colby
 For an explanation of Corequity analysis, please refer to https://corequity.org/category/guide-to-the-corequity-analysis/