Mondelez International's (MDLZ) recently announced 4Q'12 earnings show that the company failed to live up to analysts' expectations. Earnings per share [EPS] fell short of expectations by $0.02 per share. MDLZ registered net revenues of $9.50 billion, missing analysts' consensus of $9.69 billion. Reflecting on the performance, the company's chairman expressed: "Frankly, the topline was little lighter than expected."
However, I am bullish on the stock, because last year, MDLZ experienced a major transformation in the form of a spinoff of its grocery business, so it will take time before it starts meeting long-term targets. Company's topline growth target rate in the range of 5%-7% is very attainable, because around 44% of its revenues are coming through emerging markets, which are experiencing decent growth rates. Moreover, the company also maintains a very healthy growth rate in its power brands, along with opportunity to tap white spaces available all over the world.
MDLZ is the one of the world's largest snack companies with annual sales of around 36 billion. It has the largest global share in biscuits, candies and chocolates, with the second largest share in the gum market. It also has a large footprint in developing markets, with operations running in more than 80 countries. Some of the major brands are Cadbury, Oreo and Tuc.
MDLZ experienced a growth of 3.7% in net organic revenues, out of which 2.1% and 1.6% were attributed to volume mix and pricing, respectively. Power brands' net organic revenues beat the consolidated quarterly revenues helped with an attractive growth of 7%. The table below shows growth in the net organic revenues among different markets.
Source: Company Data
The developing markets of Asia-Pacific and Latin America experienced a double-digit growth rate. The Brazilian and Russian economy also rebounded and contributed in high-single digit growth rate. Europe's segment managed to grow its sales volume, but it was largely offset by declining coffee prices. However, North America, where pricing was a major driving force, was a complete turnaround compared to European markets. MDLZ experienced decent progress in their biscuits, chocolates, grocery, and cheese & beverages segments, but the gum and candy business experienced a decline of 6.2% YoY in net revenues.
MDLZ also significantly increased its advertising and customer (A&C) support expenses by the end of 4Q'12. A&C support expense has reached to 9.4% of net revenue. The company has managed to improve its margins, as was expected after the spinoff. Effective management of input costs, coupled with a favorable volume mix, boosted adjusted operating income by 7.1% YoY on a constant currency basis.
As discussed earlier, continued economic growth in the developing market will be a key growth driver, since MDLZ has a significant exposure in these markets. The rising middle class, coupled with low per capita consumption level, which is expected to rise in developing markets, is setting a perfect stage for MDLZ to tap this opportunity in the next few years to come.
MDLZ should also target the white spaces available around the globe, and this alone can bring about 1% change in revenues. There is a tremendous opportunity of white space for gum in Eastern Europe, Australia and China. On the same lines, Latin American countries along with Turkey and Ukraine have white space in chocolate segment. Combination of MDLZ and Cadbury results in revenue synergies which will enhance operating margins, lower overhead cost and expand distribution platforms.
I believe that MDLZ has an immense potential to improve its margins. As shown in the table below, margins are relatively suppressed compared to its peers, and I don't see a reason why this will continue. I expect margins to rebound due to improved sales potential, improved management of input costs and enhanced distribution channels. Also, MDLZ seems confident in passing on the rising costs to consumers, since they have done this with success in the past.
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The Hershey Company (HSY)
Source: Yahoo finance
MDLZ's policy towards A&C support expenses, which have been directed towards the power brands, seems sensible, since these power brands generate almost twice the revenues as the company as a whole. Moreover, MDLZ is also addressing issues such as tactical sales, marketing execution and capacity buildup, which are geared towards product availability and increasing customer base, especially in developing markets. So, MDLZ's focus is directed towards strengthening its current operations through new product launches and tapping white places.
MDLZ did fail to meet the analysts' expectations, but it is well on its way to generate promising results. Declining coffee prices, which lowered 4Q'12 revenues, are expected to rebound after 2Q of this year. Moreover, the company is looking at a great year ahead by directing their focus to core problems by improving sales and distribution network.