November 3, 2008 Issue Posted October 23, 2008, 5:00PM EST

Inside Wall Street

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Yum! Brands

Watson Pharmaceuticals

CSX

Gene Marcial on Investing

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Yum! Brands' Healthy Path

Restaurants aren't appealing buys in these times of economic stress, but Yum! Brands (YUM) looks appetizing, nonetheless. The world's largest stable of restaurants owns and operates such fast-food chains as KFC, Pizza Hut, and Taco Bell in over 100 countries. Yum is a standout because not only is it seeing higher sales and earnings but it's also reinvigorating U.S. sales with healthier food, such as fish, veggies, and grilled chicken.

The key drivers of Yum's growth and profitability, though, are China and other foreign markets, which account for 50% of sales, says Rick Carucci, Yum's CFO. "Yum is a great way to gain exposure to China's booming economy and the other fast-growing international markets, while investing in the only stable segment of the restaurant industry," says Ann Northrop of Zacks Investment Research, who rates the stock a buy. China (20% of sales), where Yum has 3,000 KFC eateries, "offers immense growth potential," she adds.

Joseph Buckley of Bank of America (BAC) says Yum, a client, is well positioned to generate high returns on capital and give back to investors substantial amounts of cash via share repurchases and dividends. He rates the stock, now at 26.67, a buy, with a 12-month target of 43. Buckley figures Yum will earn $1.89 a share in 2008 on sales of $11.3 billion and $2.08 in 2009 on sales of $11.9 billion. Third-quarter sales beat expectations and were "reassuring," he notes.

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

—Gene Marcial

Watson's Promising Prostate Drug

Shares of Watson Pharmaceuticals (WPI), down from 32 in April to a 52-week low of 20.17 on Oct. 10, got a swift boost the next day, to 23. That's when the Food & Drug Administration approved Rapaflo, the company's alpha blocker for the treatment of benign prostatic hyperplasia (BPH), a disease where the prostate gland enlarges as men age, impeding urine flow. Watson puts the market for BPH at $2 billion, with alpha blockers capturing $1.7 billion. Boehringer Ingelheim's top-selling alpha blocker, Flomax, posted sales of $1.5 billion in the past 12 months. "Rapaflo's fast onset of action of six to eight hours (vs. Flomax, which can take a week to work) and its clean side-effect profile could make it competitive," says Tim Chiang of FTN Midwest Securities, who rates the stock a buy, with a target of 34. He sees Rapaflo sales of $10 million in 2009 and $25 million in 2010.

—Gene Marcial

CSX: On Track for a Comeback

Railroads are a value play during economic slowdowns. As traffic volume falls, their stocks get hit. But when the economy strengthens, solid rail stocks deliver real gains to gutsy investors who bought when they were down. CSX (CSX), which operates a transcontinental rail network across the U.S., Canada, and Mexico, may be one such stock. It was beaten down, to 43 a share on Oct. 10, from 59 in May, but bounced to 49.87 on Oct. 11 as some investors, confident of CSX's future, jumped on board. The signs are promising: Third-quarter profits exceeded forecasts.

"We see 2008 revenues rising 14%," says Kevin Kirkeby of Standard & Poor's (MHP), who rates CSX a buy, with a 12-month target of 60. He also sees widening margins in 2008 and 2009, partly because of falling diesel prices. He predicts earnings of $3.67 a share in 2008 and $4.19 in 2009.

Marcial writes the Inside Wall Street column for BusinessWeek. In 2008, FT Press published the book Gene Marcial's 7 Commandments of Stock Investing.

—Gene Marcial