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Analyst Blog

On Jul 3, 2014, we issued an updated research report on Mondelez International, Inc. (MDLZ - Analyst Report).

On May 7, Mondelez announced the proposed spin-off of its coffee business to the Netherlands-based coffee company, D.E Master Blenders 1753 for $5 billion in cash. The deal will allow Mondelez to enhance growth by concentrating on its core snacks portfolio, strengthen cash position and also improve margins by cutting supply chain and overhead costs.

On the same day, the snacking giant announced first-quarter 2014 results which were better than last quarter. Additionally, both revenues and earnings beat the Zacks Consensus Estimate.

Also, with the 2012 restructuring program set to expire in 2014, Mondelez announced a new $3.5 billion restructuring plan (2014-2018 Restructuring Program) targeting aggressive cost savings and improved productivity which should enable it to accelerate its margins. The program aims to lower operating costs through supply chain cost reductions, layoffs, asset disposals and implementation of a zero-based budgeting system. The program is expected to generate annualized savings of at least $1.5 billion by 2018. The coffee deal is expected to further lower supply chain and overhead costs. Mondelez expects to use the savings to expand its operating margins to 15–16% by 2016 higher than 14–16% expected previously.

Though the plan sounds encouraging, successful implementation could be tough.

Moreover, the company’s top line continues to be weak. The global snack powerhouse has been reporting disappointing top-line results ever since it separated from Kraft Foods Group, Inc. (KRFT - Analyst Report). Weak biscuit sales in China, continued headwinds from lower coffee pricing (due to pass through of lower green coffee costs) and slower global category growth hurt revenues in the second half of 2013 as well as the first quarter of 2014.

In fact, management lowered its 2014 organic top-line growth target to reflect slower global category growth. Organic top line is expected to grow approximately 3% in 2014, in line with the category growth rate. Category growth slowed down to approximately 3% in the last two quarters due to weakness in emerging markets and lower coffee prices. Previously, category growth was expected to be 4%.

Management expects these headwinds to continue in the second quarter as well resulting in similar top-line performance to the first quarter. Moreover, even though rising coffee prices will benefit the top line in the second half, management expects revenues to improve only modestly during the period due to choppiness in the emerging markets.

Other Stocks to Consider

Mondelez carries a Zacks Rank #2 (Buy). Better-ranked food stocks include Hain Celestial Group Inc. (HAIN - Analyst Report) and Treehouse Foods, Inc. (THS - Snapshot Report).Both the stocks sport a Zacks Rank #1 (Strong Buy).

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