CHICAGO, May 8, 2014 Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include the Ruth's Hospitality Group Inc. (Nasdaq:RUTH-Free Report), Denny's Corporation (Nasdaq:DENN-Free Report), Bayer (OTC:BAYRY-Free Report), Merck & Co. Inc. (NYSE:MRK-Free Report) and Johnson & Johnson (NYSE:JNJ-Free Report).
Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.
Here are highlights from Wednesday's Analyst Blog:
Restaurants Shine: 2 Delicious Choices
Following the economic sluggishness this past winter, the economy is now gaining momentum. This has been reflected in a series of reports, one of which has revealed that the manufacturing sector had expanded in April at the quickest pace since end last year. Monday's data on the services sector also reflected an upbeat trend, indicating that growth was occurring across sectors.
Services Sector Expands
The ISM non-manufacturing index increased to 55.2 in April from 53.1 in March. This is the highest level for the index since the month of August. The new orders index increased 4.8 points to 58.2%. 14 of the 18 industries covered by the report expanded last month.
These industries include construction, retailers and restaurants. Data from the report indicates that the economy is on the verge of recovering from a weak first quarter. Lack of growth during that period has been attributed to a long and arduous winter season.
Meanwhile, the employment rate has declined to 6.3% according government data released on Friday, beating most expectations. 288,000 jobs have been added in April, creating further optimism about the economy.
Restaurant Performance Index Surges
Coming to the restaurant sector in particular, recently released data suggests that restaurant performance has increased significantly. As per data from the National Restaurant Association, its Restaurant Performance Index increased to its highest level in 10 months during the month of March.
The index increased from 100.5 in February to 101.4 in March. This is the 13th consecutive month that the index has remained above 100, which signals growth in all key industry indicators. More significantly, 55% of restaurant operators have experienced a higher level of same store sales from March 2013 to March 2014.
46% of restaurant operators experienced higher customer traffic during the same period. Additionally, operators are more optimistic about an increase in sales in the future. 49% believe that sales will increase in a six-month period compared to 40% in the month of February. This is the highest level witnessed over the last two years.
An expansion in the service sector as a whole and a growth in industry specific indicators imply that the restaurant sector makes for a good investment choice. Below we present two restaurant stocks which possess the potential to grow appreciably, each of which also has a good Zacks rank.
Ruth's Hospitality Group Inc.
Ruth's Hospitality Group Inc. (Nasdaq:RUTH-Free Report) is a company with global operations which focuses on upscale dining. The company owns the following concepts: Mitchell's Fish Market, Ruth's Chris Steak House, Mitchell's Steakhouse, Columbus Fish Market and Cameron's Steakhouse.
The company has its headquarters in Winter Park, Florida and was founded in 1965. Ruth's Hospitality Group, Inc had 150 franchised and company owned restaurants as of February 21, 2014.
The company holds a Zacks Rank #2 (Buy) and has expected earnings growth of 7.90%. The forward price-to-earnings Ratios (P/E) for the current financial year (F1) is 16.91.
Denny's Corporation
Denny's Corporation (Nasdaq:DENN-Free Report) owns and operates the Denny's restaurant brand via its subsidiary company Denny's, Inc. The company has its headquarters in Spartanburg, South Carolina and was founded in 1980.
The company had around 1,700 company owned, licensed and franchised restaurants as of February 5, 2014. Denny's Corporation has 100 restaurants across the world. These include outlets in Honduras, Guam, Curaçao, Puerto Rico, Canada, Costa Rica, Mexico, the Dominican Republic, Chile, El Salvador, and New Zealand.
Currently the company holds a Zacks Rank #2 (Buy), and has expected earnings growth of 14.80% It has a P/E (F1) of 18.51.
As the economy continues to pick up speed and employment opportunities grow, spending at restaurants is also set to increase. This is why these two choices would make excellent additions to your portfolios.
Bayer to Purchase Merck Consumer Division
German HealthCare giant Bayer (OTC:BAYRY-Free Report) entered into a definitive agreement with Merck & Co. Inc. (NYSE:MRK-Free Report) to acquire the latter's consumer care business for $14.2 billion (€10.4 billion). The companies also entered into a co-development and co-commercialization agreement for soluble guanylate cyclase (sGC) modulators.
The Deal
The purchase price of $14.2 billion is inclusive of a payment related to sales of Merck's Claritin and Afrin in certain countries where they are prescription only products. Merck's consumer care unit, headquartered in New Jersey, currently has around 2500 employees.
Bayer expects revenue savings of approximately $400 million from Merck's complementary product portfolio by 2017. Bayer will incur one-time integration charges of around $500 million in 2014/15 and expects cost synergies of around $200 million annually by 2017. Bayer will however enjoy significant tax benefits from the deal.
With the successful completion of the deal Bayer will gain full control over Merck's well-established products like Claritin, Coppertone and Dr. Scholl's. The deal is expected to close in the latter half of this year subject to approval from the relevant antitrust authorities.
Moreover, the companies will collaborate in the area of cardiovascular diseases with a focus on sGC modulation. Bayer and Merck will be sharing costs and profits from the sGC modulators program and will implement development and commercialization strategies. For the sGC collaboration, Merck will be paying $2.1 billion to Bayer including an upfront payment of $1 billion and additional sales milestone payments of up to $1.1 billion in relation to collective sales of some collaborative compounds like Bayer's Adempas.
What's in it for Bayer?
Merck's consumer care unit will be a great fit for Bayer's existing consumer care business, which contributed around $5.2 billion (€3.9 billion) of revenues in 2013. The consumer care unit of Merck on the other hand fetched around $2.2 billion in 2013. Taken together pro forma sales of both Bayer's and Merck's consumer care units came to around $7.4 billion last year. Bayer has seen year-over-year improvements of 4% and 5% in its consumer care business in 2012 and 2013 respectively. With Merck's consumer care arm Bayer will expand its existing business by over 40%.
Bayer already has well known over-the-counter (OTC) products like Aspirin (pain), Aleve (pain), Bepanthen/Bepanthol (skin care) and Canesten (fungal infections) in its portfolio. Merck's consumer care business, which focuses on areas like cold, allergy, sinus & flu, dermatology (including sun care), foot health and gastrointestinal categories, also has well-known brands like Claritin (allergy), Coppertone (sun care), Dr. Scholl's (foot health), MiraLAX (gastrointestinal) and Afrin (cold).
The acquisition will make Bayer one of the leaders in the global OTC market with many established brands. Bayer expects to become global leaders in areas like dermatology and gastrointestinal and will also advance in categories like cold, allergy, sinus and flu.
Besides category expansion, the addition of Merck's consumer care business will expand Bayer's geographic reach. We note that Merck's consumer care business has a strong presence in North America, which is apparently the largest OTC market in the world. Bayer already has a strong presence in the ex-U.S. markets. The acquisition will significantly enhance Bayer's position in the in the U.S. OTC market as well.
Bayer expects a 2% positive contribution to its earnings in the first full year following the closure of the deal. During its first quarter 2014 earnings release, the company stated that it expects core earnings to grow in the mid-single-digit percentage range. Bayer also expects its revenues to grow over 3% from next year.
Merck's Point of View
Merck will receive ample cash to push ahead with its existing business units. The company intends to invest the amount in the development of its pipeline and in upcoming launches. Moreover, Merck expects to reduce costs by an additional $2.5 billion over its previously achieved merger synergies of $3.5 billion.
Although Merck's consumer care unit consists of well-established branded products, the segment's sales were down last year.
Our Take
We are encouraged by Bayer's initiatives to expand its consumer care business. With so many branded products in its bag, we are confident that Bayer will emerge as a leader in the global OTC market. Bayer has been looking to expand its OTC business globally for quite some time now. Bayer's acquisition of Merck's consumer car unit is thus in line with its plans.
Bayer carries a Zacks Rank #4 (Sell) and Merck carries a Zacks Rank #3 (Hold). A better-ranked stock is Johnson & Johnson (NYSE:JNJ-Free Report), which has a Zacks Rank #2 (Buy).
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