If the news from the WSJ late Sunday night is accurate, Aetna (AET) offers an extremely cheap stock. The company is rumored to have finalized a deal to acquire Coventry Health Care (CVH) in a $5.7B deal.
Both companies are leading national managed health care companies. Coventry has a larger focus on government-based health plans that apparently attracted the interests of Aetna.
Considering Aetna has only a $12.7B market cap, this is a sizable deal for the company to undertake, though the company could quickly show how beneficial a mostly cash deal can be in this ultra low interest rate environment.
The deal has limited details at this point, but the key point is that Aetna is expected to pay $42.08 a share for Coventry. The deal mix is expected to be paid with at least 65% cash.
Aetna has $3.3B in cash plus strong cash flow that will help pay for the deal. Total debt at $4.7B will likely increase to help finance the purchase price.
The expectations are for accretive earnings of 45 cents in 2014 and 90 cents in 2015. More details are needed regarding 2013, but something accretive should be expected once excluding acquisition costs.
With a stock that already trades at 6.8x forward earnings, this deal could be a trigger for higher stock prices. Analysts forecast a long-term growth rate of 10% suggesting that a PE more inline with 10x the $5.58 earnings estimate for 2013 would be logical.
The rumored accretive amount for 2014 already increases earnings by a substantial amount not to mention normal growth. In essence, the stock that closed on Friday at $38 could earn as much as $6.50 in that year.
Investors should stand ready to buy Aetna on Monday if the stock remains this cheap. Any details suggesting a small bump to 2013 earnings would be a big buy signal. Even if it sells off without a deal, the stock remains extremely cheap and the company has plenty of cash to continue shopping.
Additional disclosure: Please consult your financial advisor before making any investment decisions.