China Nepstar Shares Plunged: What You Need to Know

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Chinese drugstore operator China Nepstar Chain Drugstore (NYSE: NPD  ) dove as much as 19% today after the company announced third-quarter earnings.

So what: The drop in China Nepstar's shares looks like a pretty clear case of earnings disappointment. For the third quarter, the company reported $89 million in revenue, which was basically in line with analyst expectations. However, minimum wage increases along with higher rent and logistics costs put pressure on the company's profitability, and operating income fell nearly 60% from last year. Earnings per share of $0.01 were well below the $0.03 that Wall Street was looking for.

Now what: With expected 2011 earnings per share of $0.14, China Nepstar's shares are currently fetching an earnings multiple of nearly 30. After an earnings report like today's, it's no wonder investors are questioning why they're paying such a hefty price for the company's shares. I'm as excited about China as the next guy, but when it comes to drugstores, tried-and-true U.S. giants CVS Caremark (NYSE: CVS  ) and Walgreen (NYSE: WAG  ) look like absolute bargains next to China Nepstar.

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