Abundant cash on balance sheets and in private equity dry powder is expected to fuel healthcare M&A activity this year. Hence, investors could invest in quality healthcare stocks UnitedHealth Group Incorporated (UNH), Elevance Health, Inc. (ELV), and CVS Health Corporation (CVS), which witnessed mergers and acquisitions recently. Let’s discuss this in detail.

In 2022, healthcare industry stocks and valuation multiples dropped with the broader market. Despite this, in the second quarter of last year, healthcare M&A remained strong with 17 transactions, including four mega-mergers, making it one of the most active quarters since the COVID-19 pandemic began, according to a report by KaufmanHall.

The KPMG Healthcare and Life Sciences Investment Outlook report suggests that the healthcare sector’s deal-making activities are also expected to continue this year. As per the report, 60% of healthcare and life sciences investors plan to increase their mergers and acquisitions activity this year.

The abundance of cash on corporate balance sheets and in private equity dry powder is expected to fuel M&A activity in the healthcare industry. Staffing shortages, inflation, and a challenging macroeconomic environment may prompt independent healthcare clinics to join consolidation platforms, particularly private hospitals and medical nursing homes.

In addition, other roll-up platforms, such as veterinary clinics and radiology practices, will continue to consolidate in a highly fragmented market. At the same time, telehealth, health tech, and healthcare analytics companies that can address staffing issues and facilitate the delivery of cost-effective and high-quality care are expected to attract significant investor interest.

Christian Moldt, Global Health Industries Deals Leader, Partner, PwC Germany, said, “While macroeconomic conditions may remain challenging in 2023, a resetting of valuations and the need for health industries companies to innovate and transform their businesses to achieve their growth goals and stay ahead of competitors will create a compelling case for M&A.”

Business consolidation often leads to a rise in the new company’s profits, a wider range of product lineups, and an increased customer base. Investors could consider buying quality healthcare stocks UNH, ELV, and CVS, which appear well-positioned to capitalize on this trend.

Let’s now discuss what makes these stocks worthy of investment. 

UnitedHealth Group Incorporated (UNH)

UNH is a diversified healthcare titan that operates through four segments, UnitedHealthcare; Optum Health; Optum Insight; and Optum Rx. The company’s offerings include consumer-focused health benefit plans and services, access to networks of professional healthcare providers, and pharmacy care services and initiatives.

On February 22, UNH finalized its $5.4 billion acquisition of LHC Group, a renowned national provider of in-home healthcare services and innovations. The merger prioritizes quality and seamless coordination to reduce fragmentation and complexity. The company should benefit from such initiatives by enhancing its healthcare experience.

On the same day, UNH and Somatus, the nation’s leading value-based kidney care provider, announced the extension of their value-based partnership. The new expansion involves offering high-touch kidney care services to thousands of individuals with chronic or end-stage kidney diseases in several states.

By expanding its services and geographic reach, this partnership could boost the company’s revenue streams and help it gain a competitive edge in the market.

UNH’s revenues increased 14.7% year-over-year to $91.93 billion for the first quarter that ended March 31, 2023. Its earnings from operations rose 16.3% from the year-ago value to $8.09 billion.

Adjusted net earnings attributable to UNH common shareholders increased 12.7% from the prior year’s period to $5.90 billion, while adjusted EPS grew 14% year-over-year to $6.26.

The consensus revenue estimate of $363.79 billion for the fiscal year (ending December 2023) reflects a 12.2% year-over-year improvement. Likewise, the consensus EPS estimate of $25.00 for the ongoing year indicates a 12.7% rise year-over-year. Moreover, the company topped its consensus revenue and EPS estimates in all four trailing quarters, which is impressive.

The stock has gained 3.2% over the past three months to close the last trading session at $487.28.

UNH’s strong outlook is apparent in its POWR Ratings. The stock has an overall rating of A, equating to a Strong Buy in our pro­­­­­­­­­prietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

UNH has a B grade for Growth, Stability, and Quality. It has ranked #5 in the 10-stock A-rated Medical – Health Insurance industry.

In addition to the POWR Ratings I’ve just highlighted, you can see UNH’s ratings for Value, Momentum, and Sentiment here.

Elevance Health, Inc. (ELV)

ELV is a health benefits company that offers a broad range of services such as medical, digital, pharmacy, behavioral, clinical, and care solutions. It operates through four segments, Commercial & Specialty Business; Government Business; CarelonRx; and Other.

On February 15, ELV announced the completion of its acquisition of BioPlus, a comprehensive specialty pharmacy subsidiary of CarepathRx, a portfolio company of Nautic Partners. This acquisition enables ELV to efficiently serve its clients and customers’ specialty drug requirements.

Furthermore, on January 23, ELV and Blue Cross and Blue Shield of Louisiana (BCBSLA), a company dedicated to its goal of enhancing the health and well-being of individuals in Louisiana, declared that they have entered into a definitive agreement in which ELV would acquire BCBSLA. With this acquisition, the company intends to improve patient care, which should bode well for ELV.

For the first quarter that ended March 31, 2023, ELV’s revenues increased 10.7% year-over-year to $42.17 billion. Its income before income tax expense rose 13.6% from the year-ago value to $2.62 billion. In addition, the company’s adjusted shareholder’s net income and EPS increased 13.3% and 15.5% year-over-year to $2.27 billion and $9.46, respectively.

Street expects ELV’s revenue for the fiscal year ending December 2023 to come in at $166.59 billion, up 7% year-over-year. The company’s EPS for the current year is expected to grow 12.8% from the previous year’s period to $32.80. Furthermore, the company surpassed its consensus revenue and EPS estimates in all four trailing quarters.

Shares of ELV marginally slumped intraday to close the last trading session at $456.69.

ELV’s solid fundamentals are apparent in its POWR Ratings. The stock has an overall rating of A, translating to a Strong Buy in our proprietary rating system.

ELV has a B grade for Value, Stability, and Quality. Within the Medical – Health Insurance industry, it is ranked #2 out of 10 stocks.

Click here to access additional ELV ratings for Growth, Sentiment, and Momentum.

CVS Health Corporation (CVS)

CVS is a health solutions company that operates through four segments, Health Care Benefits; Pharmacy Services; Retail/LTC; and Corporate/Other. Its offerings include health insurance products, pharmacy benefit management solutions, retail pharmacy network management, medical testing, health and wellness products, and vaccinations.

On May 2, CVS acquired Oak Street Health (OSH), a leading multi-payor primary care company. This acquisition would expand CVS Health’s value-based primary care platform and offer significant benefits to patients in underserved communities by improving outcomes and reducing costs over the long term.

Moreover, On March 29, CVS completed its acquisition of Signify Health, a leading technology and services company that enables providers to bring clinicians into patients’ homes to identify chronic conditions.

By strengthening its home presence through this acquisition, CVS advances its value-based care strategy and aims to redefine the affordability, convenience, and connectedness of healthcare for individuals.

For the first quarter that ended March 31, 2023, CVS’ revenue from the Products and Premiums segments increased 10.7% and 12.6% year-over-year to $58.15 billion and $24.4 billion, respectively. In addition, cash inflows from operating activities grew 108.8% from the year-ago value to $7.44 billion.

As of March 31, 2023, the company’s current assets stood at $68.71 billion, compared to $65.63 billion as of December 31, 2022.

Analysts expect CVS’ revenue to increase 7.8% year-over-year to $87.48 billion for the next fiscal quarter ending September 2023. The company’s EPS for the same quarter is expected to grow 2.9% from the previous year’s period to $2.21. Furthermore, the company surpassed its consensus revenue and EPS estimates in all four trailing quarters. 

Shares of CVS slumped 1.8% intraday to close the last trading session at $68.79.

CVS’ positive outlook is apparent in its POWR Ratings. The stock has an overall rating of B, equating to Buy in our pro­­­­­­­­­prietary rating system.

CVS has a B grade for Value and Stability. It has topped the B-rated four-stock Medical – Drug Stores industry.

Click here to get additional CVS ratings for Quality, Sentiment, Momentum, and Growth.

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UNH shares were trading at $493.60 per share on Friday afternoon, up $6.32 (+1.30%). Year-to-date, UNH has declined -6.57%, versus a 7.96% rise in the benchmark S&P 500 index during the same period.

About the Author: Aanchal Sugandh

Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns. More...

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