This Recent Spin-Off May Have Some Upside
Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Recently, the food giant Kraft split its North American division from the rest of its international operations, which will continue as Mondelez International (NASDAQ: MDLZ). The North American division will now be traded under the name of Kraft Foods Group (NASDAQ: KRFT) with a new ticker. As I typically like the consumer staples sector for its resilience during times of economic malaise, it seemed appropriate to examine the new stock more closely, and investigate whether or not it may be of interest to value investors.
Based on a number of fundamental valuations, the stock looks very attractive at the moment. Currently trading at 14x earnings, the stock is priced at a substantial discount to the industry average of 21.2x earnings. The price to book is also quite reasonable at around 1.5. Kraft’s largest competitor by market cap, General Mills (NYSE: GIS), trades at a comparable 15.6x earnings but with a higher 3.6 to book. Kraft has a solid 15.5% operating margin and virtually no debt with a LT debt to equity ratio of 0.16. For comparison, General Mills has a LT debt to equity ratio of 96.
Because of the recent spin-off, the earnings picture is a bit cloudy at the moment although the company seems set to perform well in the rest of the year. The street expects Q3 EPS of $0.69 and Q4 EPS of $0.56, which has cranked up the forward P/E to around 17.8x which is slightly above the industry average. Cautious investors would thus do well to wait for another earnings report before committing funds to this ‘new’ stock.
One of this stock’s most attractive features is its forward dividend yield which currently stands at 4.5%. This could make the stock potentially interesting to dividend investors, aside from its upside potential and attractive valuation. This figure puts it ahead of all its major competitors such as General Mills, which offers 3.3%, and the Kellogg Company (NYSE: K), with a 3.4% forward yield. Mondelez’ dividend yield has yet to be announced.
However, the newly minted stock has already run into a spot of trouble at the opening. Last Wednesday, in a fifteen-second period between 9.30am and 9.31am ET, the stock popped 25% on thin volume, before settling back to its original price. It is as of yet unclear what caused this spike. According to one CNBC commentator, there are several possible reasons for this unusual fluctuation. One of these is a fat-finger trade or a faulty algorithm, although most likely in his view is the lack of liquidity at the outset. Because the single security circuit-breaker doesn’t kick in until 15 minutes after the opening bell, it didn’t catch this glitch. Such price aberrations have been popping up more frequently recently, which may hurt investor confidence.
Despite this rocky opening, the stock to my mind appears to deliver solid value, and is furthermore priced attractively compared to its peers as well as to the broader market. While it remains to be seen how the company is doing in terms of earnings, Kraft’s record is pretty good. Moreover, investors would be rewarded for the wait with a healthy 4.5% dividend yield. In a sector which has proven itself time and again to be resilient during economic crises, Kraft Foods Group looks like a solid pick for income and upside potential.
DUJames has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.