Drug dispenser giant CVS Caremark (NYSE:CVS) closed out its year by reporting impressive growth in its pharmacy services business. This growth has taken close to five years to achieve, and while the top line trends look encouraging, the total profit growth outlook looks more challenging. Combined with a significant recent stock run, the investment appeal of the stock doesn't currently appear overly healthy.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Full-Year Recap
Sales advanced 11.8% to $107.1 billion. The leading contributor was pharmacy services, or the Caremark pharmacy benefit management (PBM) arm that competes with pure play rivals including Medco Health Solutions (NYSE:MHS) and Express Scripts (Nasdaq:ESRX), which are actually planning to merge and create the dominant PBM player.

Health insurers, including UnitedHealth Group (NYSE:UNH), also operate their own PBM businesses. The PBM segment for CVS posted an impressive 24.9% annual growth. The CVS retail pharmacy, which competes with Rite Aid (NYSE:RAD), reported respectable growth of 3.9% as same-store sales improved 2.3%. Each unit accounted for roughly half of total sales.

The retail pharmacy business is much more profitable and brought in $4.5 billion in profits for the year. In contrast, the PBM side brought in $2.4 in operating income. Total operating income was $6.1 billion. Pre-tax income rose a modest 2.6% to $5.7 billion. Higher income tax expense meant net income rose less than 2% to $3.5 billion. Share buybacks boosted the bottom line a bit more to 3.2% as earnings per diluted share reached $2.57. Free cash flow came in at approximately $2.91 per diluted share. (To know more about income statements, read Understanding The Income Statement.)

For the coming year, CVS expects to report earnings in a range of $2.96 to $3.06. Analysts currently project sales growth of nearly 12% and total sales of almost $120 billion. The company said to expect strong free cash flow production between $4.6 billion and $4.9 billion, or roughly $3.41 and $3.64 per diluted share.

The Bottom Line
CVS shares are bumping up against their highs for the year and currently trade at a forward P/E of about 12. The forward free cash flow multiple is slightly more reasonable at less than 12, but both multiples suggest that much of CVS Caremark's future growth is already discounted in the share price. The PBM business is finally seeing some nice growth trends, which are the first since CVS merged with Caremark in 2007.

However, it looks to be gaining new business with aggressive pricing that could make total company profit growth more difficult to sustain over the long haul. Retailing trends are more steady, but it will be hard for CVS to grow its store count aggressively going forward. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  6. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  7. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  10. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Fast Fashion

    Definition of "fast fashion."
  3. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  4. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  5. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  6. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!