'It Could Be In Walmart's Best Interest To Act': Morgan Stanley Breaks Down Pros, Cons Of A Humana Deal

Walmart Inc WMT is in early talks to acquire Humana Inc HUM, according to a Thursday Wall Street Journal report. While “healthy skepticism” surrounds a potential deal, according to the Journal, a Morgan Stanley analyst said it makes sense.  

The Rating

Analyst Simeon Gutman maintained an Equal-weight rating on Walmart with a $99 price target.

The Thesis

As it is, the competitive environment seems to warrant Walmart’s move, Gutman said in a Monday note. 

“While traditionally separate, recent attempts to verticalize health care means the model is changing,” the analyst said. “ ... Consolidation of other retailers and health care providers could put WMT at a disadvantage.”

Rite Aid Corporation RAD has Envisionrx; CVS Health Corp CVS has Caremark and is working on an Aetna Inc AET merger; Cigna Corporation CI is buying Express Scripts Holding Co ESRX; UnitedHealth Group Inc UNH is pursuing Optum; and Amazon.com, Inc. AMZN has a marked interest in the industry.

“The big are getting bigger, and with AMZN looming over the health care space, it could be in WMT's best interest to act to protect its base." 

Considering this environment, Morgan Stanley expects Walmart to align with an anchor payor. As it is, Walmart has a significant and growing presence in health care, Gutman said. 

It’s the nation’s third-largest pharmacy provider by Morgan Stanley's estimate, with $20 billion in sales; operates a small clinic business; was said to be experimenting with Aetna collaborations; and maintains a Quest Diagnostics Inc DGX partnership for in-store lab testing.

Alignment with a payor would “insulate” Walmart’s pharmacy business, expose it to new consumers, allow for lower costs, bring in more customer data and accelerate last-mile efforts through home-based services, Gutman said. 

Altogether, Morgan Stanley expects a deal to prove negative near-term as investors question the strategy’s viability, but positive ion the long term as Walmart accelerates its growth.

Price Action

At the time of publication, Walmart shares were trading down about 2.3 percent around $87.

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Photo courtesy of Walmart. 

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