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Tickers in this Article: CVS, RAD, MCK, MHS, ESRX
CVS Caremark (NYSE:CVS) rode an unexpected improvement in its pharmacy benefit management (PBM) business to better-than-expected earnings growth during its fiscal fourth quarter. However, the jury is still out as to whether the addition of Caremark to the retail drug business was a good use of shareholder capital. IN PICTURES: 10 Insurance Tips For Homeowners

Fourth Quarter Highlights
Sales improved 7.1% to $25.8 billion as retail pharmacy sales increased 4.5% to account for 56.2% of total sales. The remaining sales stemmed from the segment that competes with the likes of Medco Health Solutions (NYSE:MHS) and Express Scripts (NASDAQ:ESRX) and reported healthy 14.5% jump. This was welcome news as the PBM business had lost a number of large contracts in recent quarters and had raised concerns that the combination of the flagship retail business with a PBM one wasn't working out as planned.

Operating income from continuing operations grew 11.4% to $1.8 billion as management was able to hold expense growth in the single digits and interest expense also dropped slightly. Income from continuing operations expanded 10.2% to $1.1 billion, or 4.3% of sales for earnings of 74 cents per diluted share, which topped analyst expectations.

Full Year Recap
Total sales for the full fiscal year grew 12.9% to $98.7 billion as both primary divisions experienced double-digit top-line growth. Profits also expanded in the double digits and earnings grew 17% to $2.55 per diluted share. Net debt ended the year at a very reasonable 17.7% of total capitalization, which is well below archrival Rite Aid (NYSE:RAD) - Rite Aid has binged on acquisitions funded with debt in recent years. However, free cash flow generation, barring the effects of the proceeds from the sale-leaseback transactions, at CVS fell slightly to just over $1 per diluted share as higher operating cash flow was offset by higher capital expenditures.

Bottom Line
CVS didn't provide an outlook, but analysts currently project that sales for the coming year will increase slightly to over $100 billion and earnings will come in at $2.78 per share. As a result, the stock appears reasonably valued at a forward P/E of less than 12 times. However, free cash flow trends are murky as CVS must now spend to grow and maintain its store base. CVS will also have to spend to support wining large contracts in its PBM business, which has proven more unpredictable than originally anticipated. At current levels, a better bet may be drug distributor McKesson Corp (NYSE:MCK), which counts on Rite Aid and CVS for a quarter of its sales.

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