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Prudent Acquisitions Drive Mondelez (MDLZ), High Costs Persist

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Mondelez International (MDLZ - Free Report) is benefiting from its lucrative acquisitions and effective cost-saving efforts. Moreover, the company’s focus on innovation and brand building has been aiding growth. That said, weakness in Gum & Candy business coupled with higher costs is a concern.

What’s Working for Mondelez?

Mondelez has always been keen on expanding its business through acquisitions. Recently, the company entered into an agreement to acquire majority interest in a renowned sports performance and active nutrition brand — Grenade. Certainly, Grenade’s on-trend and tasty products position Mondelez to grow in the U.K. as well as other markets. In March 2021, Mondelez signed an agreement to acquire a renowned Australia-based food company — Gourmet Food Holdings Pty Ltd. Well, the addition of Gourmet Food to Mondelez’s solid biscuit brands portfolio (with Oreo and belVita brands) will accelerate growth in the snacking spaces well as expand its presence in Australia and New Zealand.

Mondelez completed the acquisition of Hu Master Holdings, the parent company of Hu Products on Jan 4, 2021. The acquisition will provide further growth opportunities in chocolate and cross-category potential in crackers for Mondelez. Also, the company acquired majority interest in Give & Go (in April 2020), which is a pioneer in fully-finished sweet baked goods. These buyouts significantly expanded Mondelez’s routes-to-market around the globe. The company’s focus on undertaking acquisitions to gain scale in its categories and distribution capabilities bode well.
Additionally, the company is refreshing its brand portfolio through product innovation and extending its brands to newer geographies and platforms. Further, the company’s continued product innovation under the SnackFutures platform bodes well. In fact, management plans to focus on enhancing the snacking portfolio, an area that is growing rapidly across the globe. Management, in its last earnings call, highlighted that it is on track to invest in brands as well as sales and marketing capabilities. Also, the company increased working media by double digits to support further share gains. Further, the company focuses on boosting brand popularity through advertising campaigns across different media platforms.

Hurdles on Way

Mondelez is witnessing declines in its Gum & Candy business for a while now. The category is bearing the brunt of restricted mobility amid the coronavirus outbreak. During first-quarter 2021 earnings call, management notified that the business declined nearly 16% during the quarter and 8% on a two-year basis. Further, the company informed that softness in gum business and World Travel Retail put pressure on the company’s mix.

Apart from this, Mondelez incurred pandemic-induced costs to the tune of $25 million in the quarter. Further, the company incurred almost $250 million in pandemic-led costs for 2020. These costs are related to lockdowns, supply chain disruptions and high demand for PPE among others. Apart from this, the company’s adjusted gross profit margin in the first quarter remained unchanged at 39.6%, reflecting escalated raw material costs and unfavorable product mix.

We note that, a number of players in the food space like Lamb Weston Holdings, Inc. (LW - Free Report) , McCormick & Company (MKC - Free Report) and Conagra Brands, Inc. (CAG - Free Report) are grappling with pandemic-induced costs.

Coming back to Mondelez, we believe that the aforementioned upsides and effective cost saving efforts are likely to help it stay afloat amid such hurdles. It has been undertaking some major steps to enhance savings, which are fueling margins and cash flow. Moreover, such savings are being invested in brand-building endeavors. It is also on track with eliminating other unnecessary costs from supply chain. Earlier, management highlighted that it is on track to simplify operations by reducing the number of low turn SKUs from the portfolio. In fact, the company expects to keep working in this area during 2021.

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