Shares of Mondelez International (MDLZ) have not generated much enthusiasm on Wall Street since the company spun off its seemingly less glamorous North American grocery business, Kraft Foods Group (KRFT), in October of 2012. That’s because, we think, the food maker, hampered by a slowdown in the snacks category, particularly in some emerging markets, has failed to meet its own ambitious growth targets. In fact, organic top-line growth is expected to be only about 3% this year (it was 2.8% during the March interim), down significantly from management’s initial target of 5%-7%. Still, first-quarter share net of $0.39 surpassed our estimate by a nickel, thanks to cost savings and benefits from stock buybacks. And we expect margins to widen nicely from current levels, which should support double-digit earnings advances for many periods to come.
Should investors take this opportunity to build positions in large-cap MDLZ shares? Or is the issue too expensive at present, especially for what now may be a mostly margin story? In this article, we will attempt to address these questions by taking a look at Mondelez’s business and performing an easy-to-follow SWOT analysis of the company, evaluating its Strengths, Weaknesses, Opportunities, and Threats.
Mondelez International, headquartered in Deerfield, Illinois, is one of the world’s largest snacks companies, with around 107,000 employees worldwide and annual revenues of over $35 billion. It adopted the current corporate name in late 2012 (it was formerly called Kraft Foods, Inc.), after the spinoff of its more-mature, less-sexy domestic grocery unit. The company, doing business in more than 165 countries, has leading market positions in biscuits, chocolate, gum, candy, coffee, and powdered beverages, with billion-dollar brands such as Oreo, LU, and Nabisco biscuits; Cadbury, Cadbury Dairy Milk, and Milka chocolate; Trident gum; Jacobs coffee; and Tang powdered beverages.
Dominant Brands: Aside from the nine billion-dollar brands mentioned earlier, Mondelez’s product portfolio consists of 53 other labels that each generate annual revenues of more than $100 million. The company’s market dominance appears unlikely to slip, either, given the company’s emphasis on innovation -- it routinely modifies core products when it sells them overseas, so as to make them better fit local tastes -- and distribution growth.
Attractive Categories: Snacks, including cookies, chocolate, gum, and candy, is among the fastest-growing categories in the otherwise-sluggish packaged food industry, notwithstanding the recent slowdown. Additionally, it appears to be a bit more resilient than other food niches, since snack items are often last-minute impulse purchases. This suggests that the snack category can grow in the mid-single digits over the long run, even without a blistering hot global economy.
Robust Free Cash Flow: This, along with a sound balance sheet, should enable Mondelez to reduce its debt-to-capital ratio, repurchase stock, and continue to pay a modest dividend. (The yield tends to hover around 1.5%.) Bolt-on acquisitions are also likely, especially as the company endeavors to broaden its distribution in developing countries.
Uneven Execution: While Mondelez has a fine management team headed by CEO Irene Rosenfeld, execution has not been great since the company spun out its North American grocery division. In particular, Mondelez has been hampered by capacity constraints in certain overseas markets, such as India. Pricing missteps, most notably in Brazil and Russia, have also been something of a problem. Indeed, in some cases, they enabled low-cost rivals to steal business.
Falling Gum Sales: The gum segment, which together with candy accounts for roughly 15% of the sales mix, has been a persistent weak spot for Mondelez, with the company experiencing big volume declines on both sides of the Atlantic. Furthermore, while declines appear to be diminishing, it is unclear when efforts to reverse market-share losses will begin to pay off.
Emerging Markets: About 40% of the top line comes from developing markets, which puts Mondelez on par with multinational behemoths like The Coca-Cola Company (KO - Free Coca-Cola Stock Report). Moreover, the snack maker continues to invest heavily abroad, with the goal of leveraging its leading brands in countries where powerful, long-term macroeconomic tailwinds are in place. Just last year, the company outlined big investments in the BRIC nations: it announced plans to expand a chocolate factory in Brazil; it committed over $70 million to increase gum production in Russia; it pledged more than $190 million to build a new multicategory manufacturing plant in Sri City, India; and it indicated it would spend $85 million to enlarge a key biscuit facility in China. These efforts should translate to greater sales in the important BRIC geographies as we head toward late decade. Today, BRIC sales account for about 15% of the revenue mix.
Cost Cutting: Mondelez, more focused on margins these days against a slower sales backdrop, still has lots of opportunities to save money by controlling overhead expenses and boosting efficiencies. In fact, the company, already garnering savings from manufacturing upgrades and a redesign of the supply chain that is expected to make it more competitive in the U.S. and Europe, recently outlined an incremental restructuring plan that will likely yield an extra $1.5 billion-plus in annual savings through the 2017-2019 time frame. The program also aims to boost annual productivity savings to 3% of COGS (cost of goods sold) within the next few years, which should support our view that share net will exceed $2.50 by late decade. The $2.50-a-share bottom-line target is conservative, we believe, given the powerful operating leverage that will probably materialize once revenue growth picks up again.
Commodity Pressures: Rising input costs are a threat to Mondelez, as they are to most food processors. One potential headwind worth watching is coffee prices, which appear set to rise significantly because of drought and fungus in Brazil and large coffee-producing countries. (The tough climate conditions have taken a big toll on this year’s harvest.) The higher bean prices could weigh on margins if they are not effectively passed along to consumers.
Low-Cost Rivals: Price competition from smaller, regional brands and/or private labels is always a cause for concern for market leaders like Mondelez. Thus, it is important for the company to stay innovative, carefully manage price gaps, and maintain a robust advertising budget. Otherwise, share erosion may emerge, as it has, from time to time, in less-stable international markets.
In sum, we think that the positives well outweigh the negatives here. Though the top line has weakened this year, we expect healthy organic growth to return before too long, as Mondelez makes the most of its snacks dominance and vast presence in developing nations. In the meantime, margin expansion ought to lift profits, as the company steps up its restructuring efforts. And shareholder value will likely be enhanced by capital returns (dividends and stock buybacks) and strategic actions on the M&A front.
The issue is best suited for defensive-minded, longer-term investors looking for a little growth and a small income stream. While not cheap at the current quotation, the quality stock should provide decent risk-adjusted returns through the 2017-2019 period.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.