Buying opportunity in CVS after Walgreens earnings bomb

CVS is pulling back in sympathy with Walgreens after WBA earnings were a dud. However, the adverse impact on Walgreens sales was "almost entirely from the company's non-U.S. businesses," according to the company's report. CVS operates almost exclusively in the United States, with 9,750 US locations and just 150 internationally. This suggests that CVS should be relatively insulated from the fall-off in international demand that Walgreens saw.

CVS is in almost every way a better company than Walgreens. It has better analyst ratings, better financial health, and a much better valuation in terms of PEG ratio. Its dividend yield and dividend growth are lower, but its growth plan has been more aggressive, with the rollout of HealthHub stores and telehealth services continuing on schedule amidst the pandemic. Walgreens has lagged behind CVS in its plans to add healthcare clinics to its retail stores. CVS's relationship with UPS may prove an additional tailwind amidst the pandemic. Walgreens partners with UPS's smaller competitor, FedEx.

Comment:

CVS beat analyst expectations for its earnings and got a nice post-earnings rally, but now it's selling off on news that it's being targeted by a new opioids lawsuit in West Virginia. There's currently a test case against CVS (along with many other defendants) under way in the New York Supreme Court, and a few weeks back, two counties in Ohio also filed suit against CVS. For the past couple years, opioid lawsuits have mostly targeted pharmaceutical companies. If these cases succeed in establishing liability on the part of pharmacies, it could set a precedent leading to years of expensive litigation and settlements for the company. The New York case is one to watch very closely. As you can see, CVS has dropped through a trend line on news of the West Virginia filing: