Evaluating the DJIA (Part IX): JP Morgan and Kraft

Includes: JPM, MDLZ
by: Bret Jensen
This is the ninth installment examining all thirty components of the Dow Jones Industrial Average looking for equities that might prove to be good long term investments. Today’s installment will cover JP Morgan and Kraft.
JP Morgan (NYSE:JPM) – “JPMorgan Chase & Co., a financial holding company, provides various financial services worldwide”. (Business Description from Yahoo Finance)
  1. JP Morgan is selling near the bottom of its five year valuation range based on P/E, P/S, P/B and P/CF.
  2. JPM has an A+ rated balance sheet, a management team that is widely regarded as the best of any major bank, and it yields 3%.
  3. Five insiders have purchased shares over the last two months.
  4. JPM has beat earnings estimates each of the last six quarters with the average beat about 20% over analysts’ consensus. It sells at less than 7 times this year’s anticipated earnings.
  5. The median analyst price target on JPM is $50 and Credit Suisse’s price target is $58.
  • The moribund housing market continues to provide a major headwind.
  • The fallout from the European debt crisis
  • Regulatory expansion will impact fees, costs and revenues
Prognosis: JPM is one of the best run U.S. banks and has a dirt cheap valuation which is about .75 times book value. That said, any bank stock is likely to be volatile in the near term given the debt crisis in Europe, a housing market that continues to flag, and the massive amount of new regulations on banks. If the economy does not enter a double dip recession and some kind of resolution to the Europe situation can be found, JPM should reset to a much higher price level. I think the best way to play this stock is to buy the Jan 13 40 calls at around $3. Limited downside, very high upside.
Kraft Foods (KFT)

Kraft Foods Inc., together with its subsidiaries, manufactures and markets packaged food products worldwide. The company offers biscuits, including cookies, crackers, and salted snacks; confectionery products, such as chocolate, gum, and candy; beverages comprising coffee, packaged juice drinks, and powdered beverages; cheese products, including natural, processed, and cream cheeses; grocery items consisting of spoonable and pourable dressings, condiments, and desserts; and convenient meals, which comprise processed meats, packaged dinners, and lunch combinations. (Business Description from Yahoo Finance)

  1. Kraft yields 3.3% and has raised its dividend a little over 3% a year over the last half decade.
  2. Kraft provides good operating cash flow and a low beta (.58) that you would expect from a classic defensive stock.
  3. Kraft has beat or met earnings estimates each of the last six quarters. The average beat has been approximately 7% over analysts’ consensus.
  4. Two insiders added shares in August
  5. Credit Suisse’s price target is $41 on KFT and the median analyst price target on Kraft is $40.
  • Integration risk with large Cadbury acquisition and the task of splitting the business into two companies
  • Slowing worldwide growth
Prognosis: Kraft is a classic defensive stock with a decent dividend yield. However, given it is in the mid to upper end of its five year valuation range based on P/E, P/S, P/B and P/CF; I see no compelling reasons to own it at these price levels as I believe its near term prospects are limited.

Disclosure: I am long JPM.