The Zacks Analyst Blog Highlights: GileadSciences, Brown-Forman, Beam, Constellation Brands and Diageo

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Dec 12, 2012, 09:30 ET

CHICAGO, Dec. 12, 2012 /PRNewswire/ -- 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 Gilead Sciences Inc. (Nasdaq:GILD), Brown-Forman Corporation (NYSE:BF.B), Beam Inc. (NYSE:BEAM), Constellation Brands Inc. (NYSE:STZ) and Diageo plc (NYSE:DEO).

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Here are highlights from Tuesday's Analyst Blog:

Gilead Plans 2-for-1 Stock Split

The board of directors at Gilead Sciences Inc. (Nasdaq:GILD) authorized a two-for-one stock split. The action, which will take shape through a stock dividend for stockholders as on record on January 7, 2013, is aimed at increasing the number of authorized shares at Gilead to about 1.52 billion from 759.3 million (as of November 30). The stock dividend is expected to be distributed to the relevant stockholders on or about January 25, 2013.

Following the stock split, every shareholder at Gilead (on record on January 7, 2013) will get an additional share for each share he/she currently holds. Gilead intends to commence trading at the NASDAQ at the post-split price from January 28, 2013. Gilead in its press release further stated that purchasers of its shares between January 7 and January 28, 2013 will get a due-bill. The due bill will make the buyer eligible for an additional share for each share bought.

We note that shares of Gilead Sciences have been on an uptrend since the beginning of the year driven by multiple positive catalysts, including the purchase of Pharmasset, targeting the lucrative hepatitis C virus (HCV) market and the approval of the high potential HIV therapy, Stribild. The stock is currently hovering around its 52-week high of $76.28, reached on November 23, 2012. We believe that the soaring stock price necessitated the 2-for-1 stock split.

Apart from the positive developments noted above, Gilead received further good news last month when it presented encouraging top-line data on its HCV candidate sofosbuvir from a phase III study. Sofosbuvir (formerly GS-7977) was added to Gilead's pipeline through its acquisition of Pharmasset in January 2012.

Brown-Forman to Issue Notes

Recently, Brown-Forman Corporation (NYSE:BF.B) – one of the leading producers and distributors of premium alcoholic beverages in the world – announced that it has completed the pricing of $750 million senior unsecured notes offering. Further, it is anticipated that the debt offering will be completed on December 12, 2012.

According to the company, the notes will be offered in three different tranches having distinct maturity dates. The first $250 million notes, carrying an annual interest rate of 1.00%, will mature on January 15, 2018. Another $250 million worth of senior notes, which will be issued at an annualized interest rate of 2.25%, are due on January 15, 2023. The last $250 million of notes will carry an annual interest rate of 3.75% and maturity date of January 15, 2043.

A consortium of Barclays Capital Inc., Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, U.S. Bancorp Investments, Inc., Deutsche Bank Securities, Inc. and Wells Fargo Securities, LLC are the Underwriters of this issuance.

Management at Brown-Forman stated that the proceeds from the offering along with $100 million of cash on hand will be utilized to pay the special cash dividend of $4.00 per share, which comes to approximately $850 million. The special cash dividend is separate from the company's regular quarterly dividend. Earlier on Nov 15, 2012, Brown-Forman announced an increase of 9.3% in its regular quarterly cash dividend to 25.5 cents per share, payable on Dec 16, 2012.

The company has a consistent track-record of returning cash to its shareholders in the form of share repurchase and dividend payment. Brown-Forman has paid quarterly cash dividends consecutively for the past 65 years and has been increasing it for the last 29 years. The company's recent dividend increase and special cash dividend reflects its commitment to enhance long-term value for shareholders. Through this, Brown-Forman also represents its ability to boost the long-term prospects for earnings as well as cash flows.

As of Oct 31, 2012, the company has a cash and cash equivalents of $368.5 million, long-term debt of $501.4 million and shareholders' equity of $2.305 billion. The current debt-to-capitalization ratio comes to 17.9%. However, after the completion of the debt offering, it will double to 35.2%. We believe that debt-to-capitalization ratio, following the debt offering, will gradually decline in the long run owing to the company's consistent track-record of generating cash flows, which may be utilize to bring down debt.

Our Recommendation

We believe that Brown-Forman's strategy of expanding Jack Daniel's market share in developed markets, such as France and the U.S., and emerging markets including Russia, Poland and Mexico, where the whiskey category is in the early stages of development, will enhance its top line.

However, apart from macroeconomic headwinds, distilled spirits are subject to excise tax in various countries. Rising fiscal pressure in the U.S., European and many emerging markets may lead to increasing risk of a potential excise tax on spirits by the governments of respective countries. The effect of hike in excise tax in the future may have an adverse effect on Brown-Forman's financial performance.

Above all, the company faces intense competition from other well-established players in the industry, such as Beam Inc. (NYSE:BEAM), Constellation Brands Inc. (NYSE:STZ) and Diageo plc (NYSE:DEO). Moreover, Brown-Forman encounters competition from local and regional players in the respective countries. Consequently, this may dent the company's future operating performance.

Currently, Brown-Forman has a Zacks #3 Rank, which implies a short-term Hold rating. Moreover, we maintain a long-term 'Neutral' recommendation on the stock.

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