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Inside Wall Street


Gap Is Looking Spiffy

Gap (GPS) is back in more ways than one. Not only is the apparel giant spending big to push new products at its Gap and Old Navy stores, but it's also keeping a lid on other expenses to fatten margins. The strategy is working: Second-quarter results beat Street forecasts, and shares have leaped to 21.56 from 9 in just 10 months.

"The Gap is finally moving from defense to offense in driving up sales," says Edward Yruma of KeyBanc Capital Markets (KEY) (it seeks to do business with Gap). He has upgraded his rating to buy from hold and notes that Gap plans to boost third-quarter marketing outlays by $25 million, to $147 million. Despite the heavy promotional spending, margins have stayed strong, notes Yruma. He forecasts earnings of $1.32 a share in 2009 and $1.46 in 2010, vs. 1.34 in 2008.

Gap operates more than 3,100 stores, including Old Navy, Banana Republic, and GapKids, in the U.S., Canada, Western Europe, and Asia. International sales account for 15% of total revenues. "Gap's strong free-cash-flow generation and its debt-free balance sheet differentiate it as one of the higher-quality companies in retail," says Lorraine Hutchinson of Bank of America Merrill Lynch (BAC) (it has done banking for Gap), who rates it a buy. "It has taken the right steps in a difficult environment," she adds.

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.

From Vivus, a New Obesity Drug

Vivus (VVUS) is sparking big interest in its obesity drug, Qnexa. Vivus just completed two Phase 3 clinical trials that showed positive results and will justify a new-drug application to the FDA. "We are confident Qnexa will gain approval in 2011," says Jason Butler of JMP Securities (it seeks to do business with Vivus), who rates Vivus outperform. He sees Qnexa sales of $1.5 billion in 2015.

Qnexa is an oral, low-dose drug for weight loss. The studies revealed that patients on Qnexa for 56 weeks lost 37 pounds on average. Vivus is seeking a large drug partner for the launch of Qnexa. Butler sees the company, whose stock soared to 11.80 on Sept. 9 in the wake of news reports of the trial data, posting earnings of $1.68 a share by 2014.

Marc Robins of research group Robins Group (it owns shares) says Vivus will be further bolstered by the announcement of a partner or joint venture for Qnexa.

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.

3M Posts Recovery Notes

3M (MMM), a global diversified company that makes such household and office products as Scotch tape, Post-it notes, and Nexcare adhesive bandages, has felt the recession's cold wind on its sales. But recently the stock, a component of the Dow Jones industrial average, has been on a tear, hitting 73.83 on Sept. 9, up from a 52-week low of 40 on Mar. 6. Some pros see more firepower in the stock as the economy recovers.

Zacks Investment Research upgraded its rating to outperform, based in part on 3M's second-quarter results, which beat analysts' forecasts. An increased focus on emerging markets in China and India, says Zacks, will brighten its prospects.

Mathew Christy of Standard & Poor's (MHP), who rates 3M a buy, says the stock is "attractively valued." He sees it at 81 in a year, based on his earnings estimate of $4.24 a share in 2009 and $4.59 in 2010.

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.


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