Ockham Research currently has a Hold (meaning Fairly Valued) rating on the newest member of the Dow Jones Industrial Average (DJIA), Kraft Foods (KFT), which replaced AIG at the beginning of the week. Our hold rating reflects the stock’s strong relative performance versus the broader market over the nine months of 2008. Kraft is one of the world’s largest manufacturers and marketers of packaged foods and beverages worldwide. Now operating independently of Altria Group, Inc. (MO) as of last year, Kraft was once a part of the Philip Morris empire.

Kraft owns a stable of globally recognized brands such as: Kraft cheeses, Maxwell House coffee, Oscar Mayer meats, Philadelphia cream cheese, Nabisco cookies and crackers, Club crackers, Oreo cookies, etc. With a market cap of approximately $50 billion and a dividend yield of over three percent, KFT shares, despite our hold recommendation, have some appeal as a safe harbor in this uncertain market. Furthermore, Consumer Good’s stocks tend to have defensive characteristics in recessionary market environments, such as the one we are in now.

Based on Ockham’s valuation metrics, KFT is not quite trading at a range that would earn it a Buy (Undervalued) recommendation. Its historic Price-to-Sales range is 1.40x – 1.82x and the stock’s current Price-to-Sales multiple is 1.25x. While this number is compelling, the stock’s Price-to-Cash Flow multiple is currently 13.71x. The historic range for Price-to-Cash Flow is 12.75x – 16.50x, so based on our read of this metric, the stock has not crossed a strategic threshold so as to be classified as Undervalued.

Kraft’s addition to the DJIA earlier this week gave the stock a momentary spike as index fund custodians and some active managers who attempt to replicate the Dow 30’s performance added the stock to their portfolios. Typically, whatever boost is enjoyed when a company is added to a major index is temporary at best. However, being a Dow 30 stock does bring with it a degree of prestige and visibility which will benefit holders of KFT in the future.

Again, given the current rocky market environment, diversified companies doing business in a non-cyclical part of the economy tend to have appeal. Kraft’s venerable product portfolio can expect stable sales, even in a recession. In fact, with so many Kraft brands having a value reputation, sales may improve during a downturn as grocery shoppers search for slightly less expensive, but still high-quality food brand alternatives.

Kraft has significant overseas sales, which provides the kind of global diversification that appeals when the domestic economy is struggling. Also, the 3.3% dividend yield is over three times what most money market funds currently yield. Kraft has consistently increased its dividend over the years since its separation from Philip Morris and it would be reasonable for investors to expect future dividend increases going forward.

While we would like to see KFT trade in the upper twenties before it becomes compelling valued from our perspective, given the overall environment we are in and the above-mentioned benefits of the stock, we believe that KFT shares currently have some appeal for patient, income-oriented and risk-averse investors.