December 8, 2008 Issue Posted November 25, 2008, 5:00PM EST

Inside Wall Street

Gunning Hard at Gilead Sciences

As one of the big three biotechs, Gilead Sciences (GILD) is poised to catch up to the growth rates of larger rivals Genentech (DNA) and Amgen (AMGN). Its leading drugs for treating HIV have been the driver for Gilead's surge. Concern that its anti-HIV products may be losing speed was allayed by the company's unexpectedly strong third-quarter results. In 2008, "we now expect robust top-line and bottom-line growth of 25% and 19%, vs. earlier estimates of 24% and 16%, respectively," says Kavita Thomas of First Global Securities. Based on Gilead's "strong growth prospects, above-industry-average margins, and capital return ratios, we reiterate our long-term moderate outperform rating on Gilead," she says.

Gilead has diversified beyond antivirals, notes Alan Carr of Needham, who rates the stock a buy. One compound Gilead is enthusiastic about, says Jason Kolbert of investment firm SIG Group, is a treatment for chronic hepatitis. Gilead has signed a research and licensing pact with its maker, Achillion Pharmaceuticals (ACHN). Although Gilead could pay Achillion up to $167 million in fees, the market for such drugs may approach $1 billion.

"We view Gilead as a core biotech with strong fundamentals," says S&P's (MHP) Steven Silver, who rates the stock, now at 44.14, a buy, with a target of 56. He sees profits of $2.01 a share in 2008 and $2.33 in 2009, vs. 2007's $1.68. "Gilead is positioned to invest in its pipeline and buy assets."

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

Gap Is Attracting Second Looks

Most retailers aren't drawing any crowds on Wall Street, with the tight economy crimping consumer spending. But Gap (GPS), long a pariah among investors, is starting to attract some analysts.

Laura Champine, of investment firm Cowen Group (COWN), upgraded Gap to outperform from neutral after it beat third-quarter consensus estimates. The stock, trading at 12.05, is down from a 52-week high of 22 on Dec. 26, 2007, and not far off its low of 10. "The sell-off is overdone," says Champine, "given [Gap's] continued margin improvement, rock-solid balance sheet, and cheap valuation." Of the 19 analysts who track Gap, 7 rate it a buy, 12 recommend a hold, and none tags it a sell. Gap has no financing concerns—it has $1.4 billion in cash—and can easily continue paying dividends (payout yield is 3.6%) and do stock buybacks, says Champine.

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

Philip Morris: An International Habit

The Marlboro Man is thriving, and so are smokes from Philip Morris International (PM). PMI was spun off by Altria Group (MO) on Mar. 28 and continues to profit from Marlboro cigarettes (37% of sales) and brands such as L&M, Parliament, and Virginia Slims. PMI sold 850 billion cigarettes in 2007—48.5% in the European Union; 22% in Eastern Europe, the Middle East, and Africa; 20% in Asia; and 9% in Latin America.

While risks from rising regulations and low-cost rivals remain, PMI is selling strongly in overseas markets with high-growth potential, says Richard Gallagher of Value Line (VALU). Although the stock is down to 41.20, PMI is weathering the downturn better than many other companies. "Its prospects for the long term are very good," says Gallagher, who sees profits of $3.35 a share in 2008 on sales of $65 billion, and $3.70 in 2009 on $67 billion.

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.

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

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