I am bullish on Mondelez International (MDLZ) and believe the stock is undervalued at current valuations. The company is expecting to grow its top and bottom lines by 5%-7% and double digit respectively. Significant emerging market exposure (44% of total sales) and margin expansion holds the key in achieving these impressive growth targets. Also, analysts are anticipating a high growth rate of 13.5% per annum for the next five years. Moreover, based on my target price of $32.5 (as shown below) the stock offers investors potential total return of almost 23%. Therefore, I recommend investors to buy the stock.
I believe MDLZ is a great investment for investors despite sluggish recent quarter financial performance. The financial results for 4Q'12 were affected by separation (spinoff of old Kraft) problems in Canada which had a negative 9% impact on the recent quarter revenues and an increase of 30% in advertising spending for emerging markets. However, I believe higher emerging markets advertising spending will bode well for the company in the long term. The positive takeaway from recent earnings release was a healthy 7.6% organic growth delivered by emerging markets in 4Q'12. Following are the financial highlights for the full year 2012 and 4Q'12.
Full Year 2012.
For the full year 2012, MDLZ reported net revenues of $35 billion down 2.2% YoY. However, the company experienced organic net revenue growth of 4.4%, which was driven by favorable pricing of 3.3% and volume growth of 1.1%. Operating earnings per share for the year came out to be $1.39, up by almost 5% on a constant currency basis.
Developing markets, which is an important growth driver for the company, posted healthy performance for the full year 2012. Developing markets experienced organic net revenue growth of 7% YoY led by its 'power brands' like Cadbury Dairy Milk, Oreo and Halls. Operating income for the developing market segment increased by 5.2% on constant currency basis.
Fourth Quarter 2012.
Recent quarter results missed the revenue and earnings consensus. For the recent fourth quarter MDLZ enjoyed organic net revenue growth of 3.7% YoY, slightly below analysts' revenue growth consensus of 4.1%. Lower coffee prices had an adverse impact of 0.6% on the revenue growth of the recent quarter. 'Power brands' for the company grew by 7.4% YoY. Operating EPS for the quarter was $0.36, missing the analysts' earnings consensus of $0.38 per share.
Developing markets grew by a healthy figure of 7.6% YoY in the recent quarter, mainly due to double digit growth in Latin America and Asia Pacific. Also, 'power brands' experienced 12.7% growth in the developing markets. Operating income was down 4% for the quarter on a constant currency basis. The decrease in earnings was mainly due to an increase in advertisement spending.
In the long term the company is expected to expand its top line in range of 5%-7% and experience double digit EPS growth. Significant emerging market exposure and margin expansion are expected to fuel the targeted growth for the company. Currently the company earns approximately 44% of its total revenues from emerging markets.
Also, MDLZ has lower margins as compared to its competitors, and post spinoff it is expected that MDLZ will experience margin expansion as the company will focus on its snacking business. Currently MDLZ has lower margins if compared to its competitors Kellogg (K), General Mills (GIS) and The Hershey Company (HSY). The following graph shows margins comparison between MDLZ and its competitors, based on annual results of 2012.
(click to enlarge)
Source: Annual Reports and Ycharts
MDLZ provided operating EPS guidance in the range of $1.52-$1.57 in the recent earnings release. In contrast, analysts are anticipating operating EPS of $1.56 for the current year. Also, analysts are expecting an impressive next 5 years growth rate of 13.5% per annum.
I believe the stock is currently undervalued at current valuations. For target price calculation I have used the historical median P/E of 16.5x of large U.S. food companies and 2014 analysts' EPS forecast of $1.79. Furthermore, due to MDLZ significant emerging market exposure and impressive future growth outlook I applied a 10% premium to median P/E of 16.5x for price calculation. Based on these figures, I calculated a price target of $32.5 per share for MDLZ.
P/E * EPS = Target Price
Target price of $32.5 per share provides investors an upside potential of 21.5%, which coupled with a current dividend yield of 1.9% offers potential total return of almost 23%.