Key Changes Made on the UBS Key Call List (UBS, WCRX, STZ, BUD)

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We wrote at great length last month about the Key Call and Conviction Buy lists from the major Wall St. firms, bulge bracket and otherwise. The reason these lists are important for the individual investor is that it gives them a look at the stocks that the firms have total conviction in for their clients. Any time there is an addition or an update to a list like the U.S. Key Call picks at UBS A.G. (NYSE: UBS), we want investors to know at once.

Today UBS added Warner Chilcott PLC (NASDAQ: WCRX) to their U.S. Key Call list. Warner Chilcott is a specialty pharmaceutical company that engages in the development, manufacture and promotion of branded pharmaceutical products focusing on the women’s health care, gastroenterology, dermatology and urology markets in North America and western Europe.

UBS added Warner Chilcott to the U.S. Key Call list as they believe that Wall St. underappreciates the durability of the oral contraceptive (Loestrin) and gastroenterology (Asacol) franchises. The analysts feel the strong free cash flow (FCF) yield near 20% should easily support a higher future valuation. They also cite a low price-to-earnings multiple of about four times forward earnings (vs. peers of about 12 times), which provides valuation support. Warner Chilcott recently introduced a regular dividend, which yields 3.5%. That is only slightly less than large cap pharmaceutical names that yield 4% to 6%. The Thomson/First call consensus price target is $19.77. This could become an outstanding total return purchase for investors.

Today UBS also updated U.S. Key Call list member Constellation Brands Inc. (NYSE: STZ). One of the largest alcoholic beverage producers and marketers in the world, Constellation has been a key player in the Anheuser-Busch InBev S.A./N.V. (NYSE: BUD) efforts to acquire Mexican beer maker Grupo Modelo. Two weeks ago the Department of Justice sued to block the previous deal (where Constellation would be the sole importer) due to concerns about competition in pricing. Yesterday the two companies announced plans to revise their current agreement to now completely divest the U.S. business of Grupo Modelo to Constellation. One part of that plan is for Constellation to purchase a Piedras Negras brewery in Mexico from Grupo Modelo. UBS thinks that could be accretive to earnings by as much as $0.50 per share in year one.

The UBS investment thesis for Constellation is very bullish. The analysts raise their price target to $54 from $40. By using 14 times earnings with fiscal year 2015 earnings per share estimates of $3.87 ($3.23 base earnings plus $0.64 of year two accretion, with reduced interest expense), the target seems conservative. They also believe the future at Constellation will be bright and feature: 1) an improving wine business, 2) a strong, perpetually owned beer business and 3) a spirits business that grows at double-digits. All of this adds up to combination that may support a multiple rerating closer to its consumer staples peers.

Both of these names should stand out to investors for another reason. Alcoholic beverages and pharmaceutical products do not go out of favor. After an extraordinary run on Wall St. since the first of the year, many pundits are expecting a sharp pullback. If that is the case, it may be time to sell some winners and rotate to stocks with more upside.

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