CVS Looks Healthy

I'm rarely impressed by a company that has recently swallowed a relatively large acquisition and is signing up for another. But I can't complain about the fourth-quarter and fiscal 2005 results that CVS (NYSE:CVS) reported Thursday morning.

The company is doing extremely well more than a year and a half after gobbling up Eckerd's. Given that successful addition, I'm beginning to think that an accretive addition to 2007 earnings and cash flow might not be the only thing to like about the company's acquisition of Osco and Sav-On stores from Albertson's (NYSE:ABS). The deal also increases the company's exposure in markets where it currently lacks a large presence. If the buyout is as successful as the Eckerd's acquisition, it may also mean gradually more efficient and profitable stores.

Of course, it doesn't hurt that sales, earnings per share, and free cash flow were all up for the year. Sales rose 21%, earnings per diluted share were up 25.5% (after removing a one-time benefit of $0.07), and free cash flow was up to $656.6 million after last year's dip to $63.1 million. In calculating the free cash flow, I've excluded the acquisition of Eckerd's, and I've given the company credit for its sale-leaseback proceeds. However, if the company continues to make smaller acquisitions like the Albertson's deal, I think a reasonable case can be made to start looking at numbers with acquisitions included.

Earnings and free cash flow were impressive at CVS this quarter, but I'm more impressed with the company's balance sheet; across the board, the company seems in better shape than it was a year ago. Working capital growth was tame compared to sales growth for the year, short-term debt was reduced by 71%, long-term debt is down, and none of the "other" accounts is so drastically out of line that it warrants a discussion.

While Walgreen (NYSE:WAG) is generally considered the top of the class in the drugstore industry, I think that CVS is compelling enough to deserve consideration. I've often thought that both CVS and Walgreen need to be concerned with the inroads that Costco Wholesale (NASDAQ:COST) and Wal-Mart Stores (NYSE:WMT) have made into the drugstore space, but the much smaller footprint of traditional CVS and Walgreen's stores allows them access to urban locations that are more convenient for some consumers. In short, I don't see why there isn't room for all of them, so long as each sticks to territory where it has a relative advantage.

Further doses of over-the-counter Foolishness:

• CVS' Rx for Cash
• Foolish Forecast: Knocking Over drugstore.com
• 3 Stocks that Blew the Market Away

Costco Wholesale is a Motley Fool Stock Advisor recommendation. Want David and Tom Gardner's prescription for a healthy portfolio? Sign up today for a 30-day free trial.

Nathan Parmelee owns shares in Costco, but has no financial stake in any of the other companies mentioned. The Motley Fool has an ironclad disclosure policy.