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Buyouts, Savings Plan Aid Mondelez; Latin American Unit Hurts

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Mondelez International, Inc. (MDLZ - Free Report) has managed to remain in investors’ good books, courtesy of its impressive brand portfolio and strategic endeavors like focus on acquisitions, innovation and efforts to drive savings. Such efforts helped the company keep up with its positive earnings and sales streak, when it reported second-quarter 2018 results.

While weakness in Latin America and the gum category is an aspect of concern, growth-driving initiatives have helped this Zacks Rank #3 (Hold) stock gain 6.2% in a year, against the industry’s decline of 1.4%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Buyouts & Innovations — Key Drivers

Mondelez has always been keen on expanding its business through acquisitions. The company bought 13.8% ownership in the Keurig Dr Pepper business this July, which is expected to yield favorably. Prior to this, the company concluded the buyout of Tate’s Bake Shop, which has been one of the fastest growing biscuit brands in the United States and complements Mondelez’s portfolio. Also, in January, the company teamed up with Post Consumer Brands, a business unit of Post Holdings (POST - Free Report) , to create two new cookie-inspired breakfast cereals. Nevertheless, acquisitions of LU biscuit business and Cadbury remain most significant for Mondelez, as these buyouts helped it expand internationally. The company plans to continue making acquisitions to gain scale in its categories and distribution capabilities.

Further, Mondelez is committed to refreshing its brand portfolio through product innovation and extending brands to newer geographies and platforms. Mondelez is increasing investments in in-store execution and advertising to support the Power Brands and innovation funded by cost savings from its restructuring plans. Mondelez also plans to offer good-for-you snacks and expects 50% of its product portfolio to comprise “well-being” items by 2020, which is currently one-third.

Efforts to Boost Online Business & Solid Savings Plan

To strengthen its brand presence across digital media, Mondelez formed global strategic partnerships with major platforms, including Facebook (FB - Free Report) and Amazon (AMZN - Free Report) in the United States.  Mondelez also inked an e-commerce partnership with China’s leading online and mobile commerce company, Alibaba Group. The company believes that e-commerce, its fastest growing platform, can generate $1-billion annual revenues by 2020.

Mondelez is on track with its restructuring program, which aims to accelerate supply-chain cost savings and reduce overhead costs through layoffs, asset disposals and implementation of a zero-based budgeting system to offset commodity and currency driven inflation. These savings will not only expand margins but also fund growth initiatives like streamlining infrastructure and internal processes. Additionally, savings from the company’s restructuring program are being used to fund marketing investments and capacity expansion to accelerate the top line and gain market share. Mondelez expects to complete the re-structuring program by 2018-end. Notably, such initiatives were fundamental aspects driving Mondelez’s profitability in the second quarter of 2018, wherein adjusted gross margin expanded 60 basis points and adjusted operating margin increased 130 basis points year over year, on the back of lower SG&A costs and productivity savings. Going ahead, the company expects adjusted operating margin to be 17% in 2018.

Will Sluggishness in Latin America Impede Growth?

Mondelez has been experiencing declining revenue trends in the Latin American region, since the last two quarters. Revenues from the region went down 8.7% during second-quarter 2018, owing to weaknesses stemming from Brazil. Notably, the Brazil business was negatively impacted by trucker strikes, which resulted in lost consumption and delays in shipping. Management expects volatility in Brazil to persist for the rest of 2018, which will pose threats for the Latin American region as a whole. Additionally, Mondelez’s sluggish gum business lingered in the second quarter, wherein the category witnessed weak trends across the developed regions.

The Bottom Line

Nonetheless, the company’s strong emerging market presence along with the aforementioned drivers are likely to counter such hurdles and help the company sustain growth. Markedly, Mondelez generates around 75% of its revenues from outside the United States, with around 40% coming from the emerging markets. Food/beverage companies are increasingly investing in developing and emerging markets like India, China and Brazil, which boast significant growth potential.

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