Big News From One of Our Favorite 'World Dominators'
A wave of consolidation in health care... Big news from one of our favorite 'World Dominators'... Why is Walmart interested in health care?... The stock market 'rollercoaster' continues...
The recent flurry of mergers in the health care sector continues...
In December, drugstore chain CVS Health (CVS) announced it would acquire insurer Aetna (AET) for $69 billion. And just last month, insurer Cigna (CI) agreed to purchase pharmacy-benefits manager Express Scripts (ESRX) in a deal worth more than $50 billion.
These types of major deals are becoming more common. As a result, we're seeing the formation of massive new companies.
This comes as no surprise to our colleague Dr. David 'Doc' Eifrig...
Nearly a year and a half ago, Doc told his Retirement Millionaire subscribers that further consolidation within the industry was inevitable. As he explained in the November 2016 issue...
The health care industry has undergone massive consolidation. On one end, it's happening with hospitals. From 2009 to 2015, the industry has averaged between 50 and 100 hospital mergers or buyouts per year.
The small, one-off hospitals keep getting folded into bigger health care systems. You may have seen this in your area. Here in the Northeast, names like MedStar and Johns Hopkins keep expanding. If you live elsewhere, you may see the name Kaiser Permanente cropping up on more and more billboards...
This trend will continue. A report by financial-consulting firm Deloitte suggests that the number of different health care systems will be cut in half over the next 10 years as the merger frenzy continues.
It's a similar story with other businesses in the sector...
And it's largely being driven by one simple factor. More from that issue (emphasis added)...
History shows us there's one good reason for a business to make an acquisition... improving punching power.
When buying a business legitimately increases your market share or gives you greater leverage in negotiating contracts... getting bigger makes sense.
In other words, in response to growing political and consumer pressure to contain health care costs, companies have been "teaming up" to protect their profits.
This includes those that provide health care (like hospitals and drug makers)... those that pay for health care (like insurers)... and the middlemen in between (like pharmacy-benefits managers, or "PBMs").
And as seen in the two recent examples we just mentioned, companies are increasingly looking to do so through "vertical" mergers or acquisitions, which bring two or more of these businesses together under one roof.
Last week, 'World Dominator' Walmart (WMT) became the latest to join in on the action...
On Friday, the Wall Street Journal reported that the world's largest retailer is in preliminary talks to buy Humana (HUM), one of the largest private health insurance companies with more than 14 million policyholders.
Of course, any deal would still have to receive approval from both regulators and shareholders. But if it goes through, Walmart would instantly become one of the largest companies in the industry. As the Journal reported...
Walmart has a vast pharmacy business, with locations in most of its roughly 4,700 U.S. stores and in many of its Sam's Club warehouse locations. Humana is a Medicare-focused insurer that could deepen Walmart's relationship with a key demographic – seniors – at a time when the retailer is being threatened by Amazon on several fronts.
For Walmart, a deal would hand it a new role in health care, as well as a rich trove of data. In addition to its pharmacies, Walmart already has some primary-care clinics and recently said it would work with a major laboratory company to begin offering lab-testing services in some stores.
It's no secret that profit margins are thin in the retail industry...
And as the Journal noted, e-commerce giant Amazon (AMZN) has been applying even more pressure on those already-thin margins.
With Humana, Walmart would be adding a business with more than double its current margin. It would also gain some significant growth potential. As CBS News reported on Tuesday...
Humana is the second-largest provider of Medicare Advantage plans, the private insurance programs offered through Medicare.
These plans are representing a larger share of the insurance market for Americans over the age of 65, now grabbing about one-third of all Medicare enrollees. And Medicare's rolls are slated to grow over the next two decades as the ranks of senior citizens jump from 14% of the total U.S. population to 21%.
Walmart already fills prescriptions for many seniors at its pharmacy locations. Offering Medicare Advantage sign-ups at those pharmacies could help a combined Walmart-Humana grab more of the market.
In short, Walmart could become a one-stop-shop for all of Humana's customers. The company would offer just about anything health- and wellness-related that a customer could want.
The potential upside to a deal like this is significant...
It could not only drive more traffic – and ultimately profits – to Walmart's retail locations, but it could significantly lower the company's own health care costs for its 1.5 million employees.
It's also a sign that Walmart is committed to compete with Amazon on all fronts. The company has been revamping its e-commerce presence for years and is now getting out ahead of Amazon in the health care sector.
It's too early to tell just how this will play out...
But Walmart's entry into health care could turn out to be a game-changing move for the retailer.
Of course, there are risks to any big merger. And again, it's not even certain the deal will be approved. But it appears Walmart intends to become a major player in the health care sector.
If we've learned anything over the past decade, it's that companies that can compete at scale tend to succeed. And Doc – who holds Walmart in his Retirement Millionaire model portfolio – thinks it's just the type of quality business that may be able to pull this feat off.
In the meantime, the stock market 'rollercoaster' continues...
All three major U.S. indexes opened sharply lower this morning. The Dow Jones Industrial Average fell as much as 510 points – or 2.1% – in early trading. The tech-heavy Nasdaq Composite lost nearly 2%. And the benchmark S&P 500 Index fell as much as 1.6% to trade back below its 200-day moving average for the third straight day.
But the declines didn't last long... The market had erased these losses by midday, and all three indexes closed up 1% or more this afternoon.
Regular Digest readers aren't surprised...
You know we believe this correction likely has further to run... But you also know that we expect this volatility to continue regardless.
In fact, history suggests that volatility could increase – and corrections could become more frequent – as the "Melt Up" plays out. If you're going to stay invested for the final "inning" of this bull market, you must be prepared for it.
New 52-week highs (as of 4/3/18): KraneShares E China Commercial Paper Fund (KCNY).
In today's mailbag... it seems our response to paid-up subscriber Robert P. struck a nerve. Where do you stand? Let us know at feedback@stansberryresearch.com.
"Porter's recent comments on the failures of our government were spot on. Robert P.'s response that democracy should not be criticized by libertarians misses the point. I do not know whether the libertarian tag is well-suited for Porter's views, but I know this: Athens promoted democracy right up to the point that it poisoned fair Socrates in the name of popular decency.
"No, democracy is typified by the political actions of mass foolishness and is not well-suited to any great society. A constitutional republic is indeed far superior and was the hallmark of American greatness, right up to the time when it too failed because party interests and drive for power took precedence over the primary governmental responsibility of ensuring its citizens all flourish.
"Limited government is not only salutary, it is absolutely indispensable for the sake of the governed. Otherwise, it is just another Leviathan devouring any and all who cry for liberty." – Paid-up subscriber John W.
"Bravo Justin... I am so tired of hearing about our 'democracy' from those who drink the kool aid of the left. Of course, very few on the right practice what they preach either. Vote-seeking politicians of both the right and the left have transformed America into a 'democracy.' We should always remember what Benjamin Franklin said about this subject: 'Democracy is two wolves and a lamb deciding what's for dinner.'" – Paid-up Stansberry Alliance member Charles M.
"In regard to Robert P's perfect democracy governance, try this: There is a large fire, plenty of water or gasoline is available, there are 100 ignorant people ready to help extinguish it, they vote to use the gasoline..." – Paid-up subscriber G.H.
"In reply in support of Justin... We in fact do live in a constitutional republic, which is not the same as a democracy. Every democracy has failed. Our founding fathers never wanted [this]... If we don't make changes, I don't see how our country can last another 50 years." – Paid-up subscriber John M.
"Dear Justin, Touché! Excellent response!" – Paid-up subscriber Ed E.
"Thank you, Justin. Every week my ex-congressman uncle who heads the Center for Congressional Studies at Indiana University remarks in his weekly missive about our 'representative democracy.' We don't have one... I learned it in grade school, but 34 years as a Democrat in the House and it's washed out of your brain. Thank you for bringing it up." – Paid-up subscriber Craig R.
"Why did you give a snide response, Justin, to Robert P's thoughtful comment? He is obviously an intelligent man, and you can assume that he knows what a constitutional republic is. Snideness is uncalled for in a thoughtful discussion. It represents unintelligence, an inability (or unwillingness) to confront ideas that don't correspond with your own. Definitely beneath you, Justin." – Paid-up Stansberry Alliance member Jim H.
Brill comment: Sorry to offend you, Jim. You're right, of course. But we found nothing "thoughtful" about Robert's comment. He is clearly ignorant of basic American history. Ideas are debatable, facts are not. Unfortunately, he's not alone...
"I agree 100% with the comments by Robert P. in the Stansberry Digest of April 3, 2018. There is no hope for [those] like Justin who pretend that there is an alternative government possible or even desired in the USA." – Paid-up subscriber Peter H.
Regards,
Justin Brill
Baltimore, Maryland
April 4, 2018