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Mondelez (MDLZ) Gains From Core Businesses, Hurt by Cost Woes

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Mondelez International, Inc. (MDLZ - Free Report) has been benefiting from strength in its core chocolate and biscuit businesses. The company has been focused on strengthening areas with higher growth potential through prudent buyouts and divestitures. Also, Mondelez has been witnessing a favorable performance in emerging markets.

That said, the company is battling escalated cost concerns like most other food players. These headwinds are likely to persist in the near term. However, Mondelez is undertaking efficient pricing actions to counter cost inflation. Let’s delve deeper into the abovementioned aspects.

Factors Working Well for Mondelez

Mondelez has always been keen on expanding its business through acquisitions and alliances. The company has been expanding its snacking category. As consumers prefer snacking over traditional meals, the company’s core categories — chocolates and biscuits — have historically depicted resilience to economic downturns and pricing actions. Consumers in developed countries consider chocolates and biscuits as affordable indulgences and one of the most-valued snacking products.

On Aug 2, 2022, MDLZ acquired Clif Bar, which boasts a robust snack bar business worth more than 1 billion. On Apr 25, the company unveiled that it inked a deal to buy Ricolino, which is likely to strengthen its Mexican footprint. In January 2022, the company acquired Chipita S.A., a major producer of sweet and salty snacks in Central and Eastern Europe. Contributions from this acquisition boosted net revenues in the quarter under review. Before this, in 2021, Mondelez took over a renowned sports performance and active nutrition brand — Grenade. Grenade’s on-trend and tasty products position Mondelez to grow in the United Kingdom as well as other markets.

Further, the company acquired the Australia-based food company — Gourmet Food Holdings — which operates in the premium biscuit and cracker category. Mondelez completed the acquisition of Hu Master Holdings, the parent company of Hu Products, on Jan 4, 2021. The acquisition of Hu provides further growth opportunities in chocolates and cross-category potential in crackers for Mondelez. Mondelez is committed to increasing its focus on areas with higher growth potential. On its second-quarter 2022 earnings call, Mondelez unveiled plans to offload its developed market Gum & Halls businesses to increase its focus on its faster-growing chocolate and biscuit businesses.

Moving on, the company remains encouraged by the underlying emerging market strength. In the second quarter of 2022, revenues from emerging markets increased by 22.4% to $2,806 million while rising 22.5% on an organic basis. The company saw strength in all major business units. On its second-quarter earnings call, the company stated that consumer confidence was reverting to pre-pandemic levels in emerging markets. The company’s core categories saw robust volume and penetration growth in spite of higher pricing.  

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Can Cost Woes Be Countered?

The company has been battling cost inflation and supply-chain headwinds for a while now. In the second quarter of 2022, the adjusted gross profit margin contracted by 210 basis points (bps) to 37.9% due to increased raw material and transportation costs and an adverse mix. Also, the adjusted operating income margin contracted by 110 bps to 15.1% due to inflated input costs and an adverse mix.

The company is seeing input cost inflation, especially for energy, transportation, packaging, wheat, dairy and edible oils. The company is also navigating through supply-chain bottlenecks due to labor shortages at third parties. Management’s guidance for 2022 reflects anticipation of the elevated cost of goods sold inflation, the timing impact of extra pricing actions and the impacts of the Ukraine war. While commodity cost inflation may ease, management expects other costs, such as wages, to reflect considerable inflation. Apart from input cost inflation, the guidance also includes investments to support brands and other growth-oriented investments.

Nonetheless, robust pricing actions have been aiding the company. In the second quarter of 2022, pricing actions boosted organic net revenue growth and offered partial respite to the company’s adjusted gross profit margin and adjusted operating margin, which was otherwise hurt by cost inflation and an adverse mix.

What’s More?

Mondelez’s strong second-quarter 2022 and first-half results were highlighted by sturdy top and bottom-line shows across all categories and regions, leading to the raised revenue growth guidance for the full year. Mondelez’s chocolate and biscuit businesses continue to reflect solid volume gains and pricing power in developed and emerging markets. This, together with the ongoing cost control, revenue growth management and simplification, is resulting in strong profits and cash flows.

For 2022, management now expects organic net revenues of more than 8% compared with the more than 4% growth expected earlier. The updated view reflects a sturdy first-half performance together with strong pricing associated with higher input costs. Management continues to envision mid-to-high single-digit growth in adjusted earnings per share or EPS at constant currency.

Shares of this Zacks Rank #3 (Hold) company have risen 1.1% in the past three months compared with the industry’s rise of 5.2%.

Consumer Staple Stocks Worth a Look

Some better-ranked stocks are The Chef's Warehouse (CHEF - Free Report) , Campbell Soup (CPB - Free Report) and General Mills (GIS - Free Report) .

The Chef's Warehouse, which engages in the distribution of specialty food products, sports a Zacks Rank #1 (Strong Buy). The Chef's Warehouse has a trailing four-quarter earnings surprise of 355.9%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for CHEF’s current financial-year bottom line suggests significant growth from the year-ago reported number.

Campbell Soup, which manufactures and markets food and beverage products, carries a Zacks Rank #2 (Buy). Campbell Soup has a trailing four-quarter earnings surprise of 10.8%, on average.

The Zacks Consensus Estimate for CPB’s current financial-year sales suggests growth of 0.8% from the year-ago reported number.

General Mills, which manufactures and markets branded consumer foods, currently carries a Zacks Rank #2. General Mills has a trailing four-quarter earnings surprise of 6.5%, on average.

The Zacks Consensus Estimate for GIS’ current financial-year sales suggests growth of nearly 2% from the year-ago reported figure.

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