Analyst: Why Humana And Walmart Could Make Sense Together

Retail giant Walmart Inc (NYSE: WMT) is reportedly in early discussions with Humana Inc (NYSE: HUM) that include the possibility of an outright acquisition, The Wall Street Journal reported.

The Analyst

Stifel's Mark Astrachan maintains a Hold rating on Walmart's stock with an unchanged $99 price target.

The Thesis

The strategic merits of a potential deal include the following, Astrachan said:

• The addition of new customer data could be additive to store traffic and help Walmart learn more about the health care industry. Cost savings, particularly for health care products and services.
• The ability for Walmart to sustain heightened investment levels.
• A "proactive response" to Amazon's potential entry into the health care services.

A Humana deal could be approximately 3-to-4-percent accretive to Walmart's earnings per share, the analyst said. (See Astrachan's track record here.) 

"That said, a potential transaction would also meaningfully increase the complexity of Walmart's business, including adding a heavily regulated entity that derives 79 percent of premium and services revenue from contracts with the U.S. government," Astrachan said. 

Walmart and Humana have an existing relationship through their co-branded prescription drug offering, the analyst said. If an acquisition isn't realized, the two companies can still expand their relationship — in a manner similar to CVS' strategy of expanding in-store medical clinics for basic services — which in turn will drive incremental traffic into Walmart stores, according to Stifel. 

Price Action

Shares of Humana were trading higher by 6.2 percent at the time of publication Monday. Amazon shares were down 3.7 percent. 

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