By Larry Gellar
Johnson & Johnson (JNJ) – After an extraordinarily strong spring, Johnson & Johnson has leveled off a bit. Regardless, this stock represents safety in an otherwise uncertain economy. Johnson & Johnson is only one of four U.S. companies with a AAA credit rating, and this could be important if U.S. bonds lose their AAA status. (The other three companies are Microsoft (MSFT), Automatic Data Processing (ADP), and Exxon Mobil (XOM), which is discussed below.) Johnson & Johnson is also well-known for its generous dividends, currently set at a yield of 3.40%. Additionally, the business overall is very well-diversified – Johnson & Johnson’s products range from things you would find in a grocery store to obscure medical diagnostics. Although the company has been hurt a bit in the past couple of years by product recalls, it is unlikely that this will continue to negatively affect the stock in the future. Furthermore, the recent acquisition of Synthes, a company that specializes in trauma and bone fractures, is a deal that will certainly add value to JNJ. Consider reading this for more info on the transaction. Particularly important is that Synthes’ technologies are used in necessary surgeries that happen all the time regardless of economic conditions. There are other reasons to like Johnson & Johnson’s value right now, and our article here provides some great measures to prove it.
JPMorgan Chase (JPM) – This stock has been down in recent days, most likely due to worries about what will happen to the nation’s debt ceiling. In fact, top Wall Street CEOs (including JPMorgan Chase’s CEO Jamie Dimon) have sent a letter to President Obama and Congress expressing their concern over the issue. Although a U.S. default would result in financial catastrophe, some experts have predicted that companies like JPMorgan Chase might benefit from the increased bond trading that would result. Regardless, it is hard to predict how bad the stock market’s reaction would be in such a situation. JPM stock has also been affected by the possible bankruptcy of Jefferson County, Alabama. JPMorgan Chase owns a large portion of the county’s bonds and figures to take a sizable loss should the county declare bankruptcy. JPMorgan has also had some rather negative cash flows in the past year, but this is not necessarily a good indicator of what’s to come. There is still reason to believe the company is undervalued, such as a P/E ratio of only 8.76. Additionally, Barclays has raised its 2011 and 2012 EPS estimates for JPMorgan Chase by 60 cents. If JPMorgan Chase’s P/E ratio stays constant, this would represent a significant increase in the stock price. Both Jeremy Grantham and Bruce Berkowitz hold positions in JPM.
American Express Co (AXP) reported its largest profit ever on July 20, although the country’s fiscal uncertainty has brought the stock down in the past week. Regardless, Goldman Sachs has taken notice, explaining why the company is rated as a Buy. Specific results of the earnings report were also very strong for the credit card company. Notably, earnings from continuing operations were up 27% and revenues were up 12%. Card member spending is at an all-time high. In fact, American Express has had a strong 2011 overall, and is in a somewhat unique position compared to other financial companies due to its focus on credit cards and charge cards. Note that a U.S. default would probably cause interest rates overall to go up because of a change in the country’s credit rating, and this would certainly benefit companies like American Express. Other trends should also help American Express. Visa (V) too reported strong earnings, and it is because people are increasingly using cards rather than cash for their payments. Also note that AXP’s P/E ratio is only 14.17 compared to 18.91 for Visa and 20.78 for Mastercard (MA). If there is one concern to be had with AXP, it is its high beta (1.98), which could be dangerous in an economy that has yet to prove it can fully recovery. We think AXP remains a better bet than Discover (DFS), which remains a much weaker competitor due to its fourth place brand recognition.
3M (MMM) – This conglomerate has been on a sharp decline of late due to a poor earnings report. Numerous reasons were cited for the poor performance, including a sluggish U.S. economy and Japan’s recent catastrophe. However, 3M may benefit as Japan rebuilds due to need for basic industrial goods. Rising supply costs are another factor hurting 3M, but chief financial officer David Meline explained that the company has a plan to gradually increase prices to make up for this. Also, shareholders are looking forward to the company’s Transportation Manufacturers Summit for news about its latest products. Some shareholders have been worried about insider selling, but this should not be taken too seriously. In fact, MMM is trading at a rather low PEG compared to some of its competitors. Note that MMM’s PEG is 1.13, compared to 1.80 for Avery Dennison (AVY), 1.39 for DuPont (DD), and 2.18 for Johnson & Johnson. Operating margin is also strong compared to the rest of the industry – 3M’s is currently 21.90%. Another thing that can’t hurt is that 3M is in a position of support right now. It’s hard to imagine the stock falling further, and it is likely that investors are overreacting to recent news that 3M’s sales are declining due to a changing TV market.
McDonald's (MCD) has been on the climb this year and for good reason. As discussed in this article, the company’s international operations are doing well and it's having success with raising its prices. Additionally, McDonald’s is well-poised regardless of what happens in the U.S. In other words, MCD will do well regardless of whether the economy sputters or somehow finds a way to improve. With a beta of 0.36, this is clearly a stock to hold in these pessimistic times. Also, MCD is trading at 18.34 times earnings, which is higher than many other companies nowadays, but this seems more than reasonable for the food industry. In fact, competitor Yum! Brands (YUM), owner of franchises like Taco Bell, KFC, and Pizza Hut, is trading at an even higher multiple of 21.16 times earnings. For more information on why McDonald’s is a good buy right now, consider reading this. Unlike many other retail operations, McDonald’s is seeing strong same-store sales. Other positive numbers include large increases in revenue and operation profit. Although Starbucks (SBUX) reported strong earnings today, even McDonald’s coffee is proving to be quite profitable. In addition, competitors like Ruby Tuesday (RT), Red Robin Gourmet Burgers (RRGB), Burger King (privately held), Wendy’s (WEN), and Sonic (SONC) can’t seem to keep up.
AT&T (T) – This telecommunications mainstay has had its share of volatility this year and is now trading around what it was in January. The interesting thing about this company is one of its main competitors, Sprint Nextel (S), currently has negative trailing 12 month earnings, and the other, Verizon (VZ), has a whopping P/E ratio of 28.53. Note that AT&T is currently only trading at 8.35 times earnings. In fact, the telecom industry as a whole could benefit if at least one implication of the debt ceiling talks goes through. Specifically, Senator Reid has proposed that the FCC auction off airwaves to raise money for the government. AT&T would certainly be a participant in such an auction and a successful bid would improve the company’s ability to transmit data to products like smartphones. In light of News Corp.’s (NWS) recent scandal, one factor increasingly being used to evaluate companies is its corporate structure. As discussed in this article, AT&T is considered to be low risk for specific factors such as board, audit, compensation, and shareholder rights. AT&T also stands to benefit from its pending deal to acquire T-Mobile (OTC:DTEGY). The recent earnings report was a boon to the company as well. Data revenue was up sharply, and this trend should continue as consumers find new ways to burn through data on their smart phones.
We also consider AT&T to be one of this summer's safe dividend kings.
United Technologies Corp (UTX) – This stock has been on a steady rise for nearly a year now, and it seems unlikely that the ride is over. In fact, a recent downturn due to uncertainty in the U.S. economy makes now a very good time to buy. One way to play this stock can be found here. Additionally, both earnings per share growth and dividend growth look good for UTX, as explained here. Other statistics for the company have been positive as evidenced by the recent earnings report. Specifically, earnings per share were up significantly as well as sales. Also, chairman and CEO Louis Chenevert had some exciting things to say at the earnings press conference. He said, “For the first time since the second quarter of 2008, all six of our business segments reported organic sales growth in the quarter …. More encouragingly, order rates remain strong and in line with expectations across most of the segments including our longer cycle commercial construction related businesses.” As described here, though, some of the strong numbers can be attributed to favorable movements in the currency markets. Regardless, the company is trading below many analysts’ targets right now. Other recent news that should make shareholders happy is that UTX is considering selling its rocket engine unit. This move would certainly add value to a company that at the moment may be spread too thin.
Exxon Mobil – This stock has been on an impressive run the past year, and the earnings that were just released can only help. In fact, Exxon Mobil’s profits were so large that many are calling for an end to the subsidies that currently exist for oil companies in the U.S. This comes at an interesting time because the oil industry is actually now turning back to the U.S. to find new places to drill. Exxon Mobil is particularly well positioned for such a move because the company has large assets in what is known as the Marcellus shale region. This region in the Northeastern United States figures to be highly profitable. Exxon Mobil has other holdings that will benefit it. Its acquisition of XTO Energy is working out well, and in June the company found quite a bit of oil in the Gulf. Exxon Mobil did warn that it would be affected by the sluggish economy, but it seems unlikely that anything can stop this oil giant. Demand for oil is at an all-time high, and it will be quite some time before this changes. Regardless, Exxon Mobil is also strong in the natural gas department. If there is one thing that might affect this stock in the short-term, though, it's Tropical Storm Don.We think Exxon remains a better bet than other U.S. based oil majors Chevron (CVX) and Conoco Phillips (COP).