Why Walgreens Stock Underperformed CVS in August

Walgreens Boots Alliance (WBA) stock underperformed CVS Health (CVS) stock last month, with Walgreens falling 6% and CVS rising about 9%. Walgreens’s retail sales and margins continued to be pressured.

In its fiscal 2019 third quarter, Walgreens’s US retail sales fell 2.9%, while its retail sales fell 1.1%. Its international retail pharmacy sales fell 7.3%, dragged down by Boots UK. Furthermore, Walgreens’s bottom line has fallen in the last two quarters, impacted by reimbursement pressure in the pharmacy segment and lower retail sales. These persistent challenges are blocking its stock’s recovery.

In comparison, CVS stock has benefited from two back-to-back strong quarters. The company reported its second-quarter results on August 7. In this year’s first two quarters, CVS’s bottom line has grown robustly, exceeding analysts’ estimates by a wide margin despite reimbursement pressure.

Backed by its strong first-half performance, CVS raised its fiscal 2019 earnings outlook. The company’s strong sales, earnings, and guidance helped its stock recover.

As of August 30, CVS stock had fallen about 7% this year, while Walgreens stock had fallen about 25.1%. However, in the last three months, CVS stock has risen 16.3%, whereas Walgreens has risen by about 4%.

What their valuation indicates

Walgreens stock has a low valuation, trading at 8.5 times analysts’ fiscal 2020 EPS estimate of $6.01. However, this low valuation is justified. Analysts expect Walgreens’s EPS to stay pressured in the near term, and be flat or rise marginally YoY (year-over-year) in fiscal 2020. Walgreens’s low single-digit revenue growth and reimbursement pressure could hurt its bottom line.

Meanwhile, CVS stock trades on par with Walgreens, but offers better growth based on analysts’ estimates. Analysts expect CVS Health’s top line to grow robustly in the near term, driven by the company’s Aetna acquisition. They also expect the company’s bottom line to grow more than Walgreens’s. Analysts expect CVS Health’s bottom line to grow by a low-to-mid-single-digit percentage in 2020 despite a tough YoY comparison.

Analysts recommend “buy” for CVS stock

Of the 26 analysts covering CVS Health stock, most (16 analysts) suggest “buy,” and ten suggest “hold.” Their target price of $68.73 for CVS implies a 12.8% upside based on its August 30 closing price of $60.92.

As for Walgreens, two of the 23 analysts covering the stock suggest “buy,” 18 suggest “hold,” and three suggest “sell.” Their target price of $57.32 implies an approximate 12% upside based on its August 30 closing price of $51.19.