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Why CVS Health’s Stock Fell after Its 2Q15 Earnings Release

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Market reaction to CVS Health’s earnings

CVS Health’s (CVS) stock price slumped by 2.5% to $109.96 on August 4, the day the company declared its 2Q15 earnings. The company’s performance in its higher-margin Retail Pharmacy segment was disappointing. We’ve discussed the segment’s performance in Parts 3 and 4. Plus, price compression trends in its Pharmacy Services segment continued.

The prices of CVS’ competitor Walgreens Boots Alliance (WBA) dipped 0.3% to $95.67 while Rite Aid (RAD) rose 2.8% to $9.08. RAD recently reported a 2.4% increase in comps for July, driven primarily by higher pharmacy same-store sales.

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Valuations

CVS’ valuations also fell following the 2Q15 earnings release. The stock’s forward price-to-earnings (or PE) ratio fell by 2.6% to 19.8x forward earnings. In contrast, WBA, DPLO, and RAD were trading at 22.7x, 63.4x, and 36.3x forward earnings, respectively. The S&P 500 Index (SPY) and the S&P 500 Food & Staples Retail Index (XLP) (XRT) were trading at 17.7x and 20.2x forward earnings, respectively[2. Valuations data as on August 4].

Although its performance has been volatile, Rite Aid’s valuations have been boosted by strategic initiatives like the revamping of store formats, the acquisition of RediClinic last year, and the proposed purchase of EnvisionRx. These will see Rite Aid become a more integrated pharmacy player, akin to CVS.

WBA has seen higher growth in same-store sales compared with CVS, outperforming the latter in the last nine quarters. In addition to its strong private brand portfolio, diversified geographical presence and higher exposure to the retail pharmacy side of the business has boosted the stock’s performance and valuations. Read more about growth and relative valuations for CVS and peers in the next article.

CVS, Walgreens Boots Alliance, and Rite Aid together constitute ~3.3% of the portfolio holdings of the SPDR S&P Retail ETF (XRT) and ~13.1% of the holdings in the First Trust Consumer Staples AlphaDEX ETF (FXG).

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