Legislative issues surrounding healthcare are not going away anytime soon and investors need to remain alert of the threat.
Shares of CVS Health (CVS) surged in morning trading on Wednesday after reporting a solid quarter that beat across the board and brought full year outlook closer to the initially bullish expectations for the company set in 2018.
Still, the elephants in the room as the political fervor heading into the 2020 election season heats up are ['Medicare for All' proposals and potential slashes to pharmacy benefit management businesses.
"You've got Senator Sanders shooting against you," Action Alerts PLUS portfolio manager Jim Cramer warned.
Every year that Washington keeps working for the rich and the powerful, Medicare is more likely to come under attack. Enough is enough. We need to protect and expand Medicare. #MedicareForAll— Elizabeth Warren (@ewarren) April 30, 2019
Cramer advised waiting until the company hits a level around eight times forward earnings, which the earnings beat and subsequent stock pop has raised it slightly above.
"I want you to get in at a price that is equivalent to eight times earnings," Cramer advised. "At eight times earnings with that yield, you can hold it through the whole election if you want to."
The issue emanating from voices like Vermont senator Bernie Sanders, New York representative Alexandria Ocasio-Cortez, and Massachusetts senator Elizabeth Warren is that it is beginning to shift the window toward government provided healthcare.
Such legislation would necessarily crush the opportunity CVS sought to seize upon when it picked up Aetna for a hefty $70 billion.
UnitedHealth Group (UNH) CEO David Wichmann addressed the risk in his company's earnings call in mid-April.
"The wholesale disruption of American health care being discussed in some of these proposals would surely jeopardize the relationship people have with their doctors, destabilize the nation's health system, and limit the ability of clinicians to practice medicine at their best," Wichmann said. "The inherent cost burden would surely have a severe impact on the economy and jobs, all without fundamentally increasing access to care."
The sway that such comments held was readily apparent, as the stock slid precipitously despite a beat and raise on the print.
"While earnings fundamentals for the MCO group remain strong, the Medicare-for-All overhang remains the dominant narrative," Evercore ISI analyst Michael Newshel lamented at the time. "Management faced a bit of a catch-22 on engaging Democrat's Medicare-for-All proposals on the call; they gave the right critique on system disruption and alternatives to universal coverage, but the attention itself elevates the issue in a sensitive market."
That impact was exacerbated by the aforementioned presidential candidate Bernie Sanders, who actually garnered applause for his universal healthcare aims from a typically conservative Fox News audience.
Looking to avoid a similar fate, CVS skirted the topic, opting not to call out legislators in the same fashion that UNH had.
"More broadly, the renewed focus nationally on what the next phase of access to affordable quality health care will be has generated significant attention in recent weeks," CVS CEO Larry Merlo told analysts on Wednesday morning. "This is an important discussion and we will continue to be an active participant. That said regardless of what shape and form the next stage of health care takes we remain confident that the private sector will play an essential role in both shaping and executing that next stage."
Analysts largely thought this was the wisest course of action for the company after UNH's disastrous riposte.
"The company, while not citing Medicare for All in name, did address the overarching topic and noted the private sector would be essential in shaping and executing on what the next stage of healthcare will look like," Barclays analyst Steve Valiquette noted.
He said that such an outlook should be welcomed by the market as CVS continues to pay down debt from its Aetna acquisition.
Valiquette expects much more color to be provided at the company's analyst day on June 4, namely on cash flow and debt targets as it folds Aetna into its overall business.
The idea of a seat at the table rather than combating Congress falls in line with CVS' strategy for its PBM business. In the end, it may be the best course of action.
As CVS stock continues to run, management's careful approach should be encouraging for beleaguered investors. For those looking to play an inflection point ahead of the election, there might be another opportunity as chips are taken off the table from fast-moving hedge funds.
Once that downside is priced in, a nice dividend and relatively consistent earnings should serve as a solid defense for the stock even if the oval office might look more adversarial in coming years.