CVS Has Major Mo'

Throughout the universe of retail stocks, I can't see a company with more momentum these days than CVS Caremark (NYSE: CVS). Last year's acquisition of pharmacy benefits provider Caremark is an object lesson for Foolish investors in how synergies from vertical integration can transform a company.

Fourth-quarter results tell the tale. Sales rose 81% from last year. The retail segment posted just 5% sales growth -- slower than the full-year 14% -- but remember, flu season is off to a slow start this year. The Pharmacy Services segment, acquired at the end of last year, made up the rest of the sales increase. It now represents approximately 50% of total CVS sales.

Operating profit in the quarter leaped forward 97% year over year. The key driver was expense leverage, with total operating expenses across the entire organization up a measly 16% over last year. Whenever a company can acquire a complementary business that nearly doubles its sales, but only requires a modest increase in operating expenses, good things generally follow.

Earnings per share (under GAAP) of $0.55 were up 12% on a 73% increase in the share base; the Caremark acquisition, a stock deal, resulted in the extra shares. While this EPS growth doesn't sound as impressive as CVS' other fourth-quarter numbers, beating analyst expectations by a mere penny, the quarterly release's most anticipated news was CVS' guidance for next year.

Sales are expected to grow 13%-16%, including $700 million in revenue synergies from the combined retail and pharmacy benefit operations. Management estimates EPS growth between 18% and 21%. Free cash flow should be approximately $3 billion, up from $2 billion in 2007 (excluding acquisition costs).

What will the company do with all that cash? CVS expects to complete the last piece of a $5 billion share repurchase, authorized during last year's first quarter. While management isn't letting on just yet, don't be surprised if another large share repurchase is in the cards for 2008.

We're starting to see some signs of life in retail stocks. Wal-Mart (NYSE: WMT) is apparently getting its act together -- the stock is trading over $50 for the first time since the company announced major changes in its growth strategy last June. Costco (Nasdaq: COST) and Target (NYSE: TGT) shares are starting to show some upward momentum, although Walgreen (NYSE: WAG) remains in the doldrums.

But we're still in the midst of uncertain times. With an integrated retail/health-care benefits business model that appears recession-resistant, CVS looks to me like the strongest play right now in the retail world.

For more recent retail news, check out:

• Walgreen Shapes Up for 2008
• Can Wal-Mart be Nimble?
• Digging Those Discounters