On Jan 22, we initiated coverage on Mondelez International, Inc. (MDLZ - Analyst Report) with a Neutral recommendation. Although the global snack powerhouse enjoys strong fundamentals, we remain on the sidelines due to its struggling top-line performance.
Why a Neutral Recommendation?
We are encouraged by Mondelez’s strong portfolio of iconic brands, potential for margin expansion and commanding presence in the fast growing emerging markets.
Mondelez is a global snacks powerhouse — a worldwide leader in biscuits, chocolate, candy and powdered beverages and a dominant position holder in gum and coffee. Its product portfolio includes some popular billion-dollar brands like Oreo and Nabisco biscuits, Cadbury chocolates, Trident gum, Jacobs coffee and Tang powdered beverage.
Moreover, 40% of the company’s revenues come from the fast-growing emerging markets including Brazil, China, India, Mexico, Russia and Southeast Asia. The company has been seeing strong growth in these markets since its acquisition of Cadbury Limited in Jan 2010. The acquisition allowed it to tap into the latter’s vast distribution networks in countries of India, Brazil and Mexico. These markets have grown sequentially in 2013, from 9.4% in first quarter of 2013, to 9.7% in the second and 10.7% in the third. In fact, emerging markets are expected to be the primary growth driver for Mondelez, going forward, contributing around 4%–5% of the company’s overall growth.
However, the company has reported disappointing top-line results since it separated from Kraft Foods Group, Inc. . Slower global category growth and continuous slide in coffee prices has generally hurt the top line. Its third-quarter 2013 results were dismal with Mondelez barely managing to meet the Zacks Consensus Estimate for earnings but missing the same for revenues. Weak biscuit sales in China, continued headwinds from coffee pricing and slower global category growth took a toll on the top line.
Mondelez also lowered its organic revenue guidance for 2013 as the present headwinds are expected to continue in the fourth quarter as well.
Though sales have been slow, the company shows tremendous margin expansion potential. Since 2008, the company has improved operating margins by 300 basis points (bps), largely through overhead reductions.
The company is taking some major steps to improve margins, cash flow and return on invested capital. Mondelez is building an integrated supply chain organization, also simultaneously restructuring its supply chain network and driving productivity improvement through Lean Six Sigma, procurement transformation and simplification. Supply chain/productivity savings, improved product mix (with higher margin power brands becoming a larger share of the total revenue) and overhead leverage are expected to help the company achieve 60 bps–90 bps of annual operating margin improvement over the next three years. Mondelez is primarily focusing on expanding operating margins in North America and Europe by 500 bps and 250 bps, respectively, by 2016. These margin improvements will be re-invested to support growth in emerging markets.
Mondelez carries a Zacks Rank #2 (Buy). Other better-ranked food companies are Post Holdings, Inc. (POST - Snapshot Report) and The Hain Celestial Group, Inc. (HAIN - Analyst Report) . Both the companies carry a Zacks Rank #1 (Strong Buy).