Walgreen 's (NYSE: WAG) shareholders shouldn't need any spoonfuls of sugar to help this medicine go down: The company just beat estimates.

In its fiscal fourth quarter, the company's net sales grew 7.6% to $15.7 billion, yet despite a slight improvement in gross margins, earnings slipped on higher relative interest costs and selling, general, and administrative costs. Net income fell 1.5% to $436 million or $0.44 per share; however, after adjusting for extraordinary items both this year and last, earnings per share were pretty much flat from a year ago.

Busy, busy, busy
The lackluster bottom-line performance for the quarter is a small price for the long-term payoff that Walgreen wants to see from its internal investments. The company has proven itself to be very capable of holding its own in a difficult environment.

Walgreen has take steps to facilitate smoother operations and build customer satisfaction. Its Rewiring for Growth initiative has already produced some cost savings in store payroll, and management sees promise in its Customer Centric Retailing platform. If successful, they should also help establish Walgreen in consumers' minds as a superior alternative to in-store pharmacies at grocery stores and big retailers like Wal-Mart (NYSE: WMT) and Costco (Nasdaq: COST).

Walgreen currently has 7,042 drug stores, vying back and forth with rival CVS Caremark (NYSE: CVS) for the title of largest drugstore chain in the U.S. Walgreen expects to see its number grow by 4.5% to 5% in fiscal 2010 and 2.5% to 3% percent annually starting next year.

The company also now has a contract to provide Caterpillar 's (NYSE: CAT) workforce with direct pharmacy services, which will reduce costs for the heavy equipment giant and further  Walgreen's strategy of directly marketing to employers and managed-care organizations.

Anatomy and diagnosis
Walgreen has very little debt relative to the book value of its equity, positive working capital, and adequate cash levels. For the year, its operations generated $4.1 billion in cash flow, which it used in part to make investments in the company.

But there are some potential problems with Walgreen. For one, its shares trade at a premium to its direct competitors and the drugstore industry as a whole. Furthermore, its pharmacy operations are vulnerable to government regulation, specifically with regard to reimbursement rate cuts.

So even if you could scoop shares up at bargain prices, Walgreen is still a risky bet. My advice for health-care-oriented stocks right now is to buy them at your own risk. Care to differ? Share your comments below.

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This article was originally published as A Tough Pill to Swallowon Fool.com

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