FBR Downgrades Aetna: Humana Is 'Nice,' But Results Are Inconsistent

July 6, 2015

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In a report published Monday, FBR Capital Markets analyst Steven Halper downgraded the rating on Aetna Inc (NYSE: AET) from Outperform to Market Perform, while raising the price target from $120 to $130, after the company announced plans to acquire Humana Inc (NYSE: HUM) (rated Market Perform).

Aetna intend to acquire Humana for $230. “Given its large presence in Medicare Advantage, Humana is a nice asset, but results have been inconsistent. With an acquisition price of $230 per HUM share, a reasonable level of synergies, and a 54/46 cash/stock split, we estimate nominal EPS accretion,” analyst Steven Halper mentioned.

Aetna’s management expects the acquisition to be neutral in 2016 and result in mid-single-digit percentage accretion in 2017.

Post acquisition, the company’s revenue mix is expected to skew more in favor of government sources. The revenue from government sources is expected to increase from 40 percent at present to 65 percent after the integration.

“Given the change in mix, integration risk, and limited upside to our revised price target, we are lowering our rating on AET shares to Market Perform from Outperform,” Halper added.

In the report FBR Capital Markets noted, “Aetna/HUM will have to increase pricing in 2017 and/or change its network approach in order to improve the profitability of its MA and exchange-based plans.”

“Given its investment in its Accountable Care Solution products, we believe the company is likely to be a net market share gainer over the longer term,” the report added.