Two food processing companies in the consumer defensive sector, with short-term positive catalysts, will be presented in this article. Mondelez International Inc (MDLZ), with a new buyback plan, and Dean Foods Co (DF), with the recent positive upgrades from analysts, will be updated. Both stocks will be analyzed fundamentally and technically. Investing strategies will also be presented.
Mondelez International Inc
MDLZ was separated from Kraft Foods Group (KRFT) to unlock a higher multiple for its faster-growing snack business. As a leading player in the global confectionery space (15% share of the chocolate market, 30% of the gum category, and 7% of the candy aisle worldwide), who also owns dominant share of the biscuit category (18% of the market), MDLZ is a gem for investors looking for stability, income, and international growth. MDLZ is expected to achieve 5% plus revenue growth in the next 2 years. MDLZ was up 0.19% and closed at $28.52 on March 14, 2013. MDLZ had been trading in the range of $24.32-$28.75 in the past 52 weeks. MDLZ has a market cap of $50.72B with a low beta of 0.59.
On March 13, 2013, MDLZ's Board of Directors had authorized the repurchase of up to the lesser of 40M shares or $1.2B of Mondelez International's Class A Common Stock. The primary purpose of the program will be to offset dilution from the company's equity compensation plans. The authorization to repurchase shares will end in three years, unless it is terminated or extended by the Board of Directors. MDLZ currently has 1.78B of shares outstanding. The Board of Directors of Mondelez International, Inc. had declared a regular quarterly dividend of $0.13 per common share of Class A stock. This dividend is payable on April 15, 2013, to stockholders of record as of April 1, 2013. MDLZ currently offers an annual dividend yield of 1.82%.
Analysts currently have a mean target price of $30.11 and a median target price of $31.00 for MDLZ. Analysts, on average, are estimating an EPS of $0.34 with revenue of $8.70B for the current quarter ending on March 13, 2013. For 2013, analysts are projecting an EPS of $1.57 with revenue of $36.65B, which is 5.40% higher than 2012.
There are a few positive factors for MDLZ:
- MDLZ remains as one of Warren Buffett's major holdings with the total holding valued at $366,338,039
- MDLZ's strong portfolio of well-known brands and expansive distribution platform give MDLZ a wide economic moat
- Higher net margin of 8.6 (vs. the industry average of 8.4)
- Lower debt/equity of 0.5 (vs. the average of 0.9)
- Lower P/B and P/S of 1.6 and 1.5 (vs. the industry averages of 2.1 and 1.7)
- MDLZ generates an operating cash flow of $3.92B with a levered free cash flow of $1.59B
- MDLZ currently offers an annual dividend yield of 1.82%
Technically, the MACD (12, 26, 9) indicator is showing a bullish trend. The momentum indicator, RSI (14), is picking up and indicating a strong buying momentum at 63.29. MDLZ is currently trading above its 50-day MA of $27.62 and 200-day MA of $26.42, as seen from the chart below.
How to Invest
MDLZ's strong economic moat and healthy balance sheet, as well as strong cash flow, make it a long-term buy. For bullish investors, a credit put option spread of $25/$27 can be reviewed, which will allow investors to gain some upside credit premium or allow investors to acquire MDLZ share at a price below $27 upon options expiration. Investors can also review the following ETFs to gain exposure to MDLZ:
- Consumer Staples ETF (VDC), 4.42% weighting
- Consumer Staples Select Sector SPDR (XLP), 3.24% weighting
- Dow Jones U.S. Consumer Goods Index Fund (IYK), 2.95% weighting
Dean Foods Company
Dean Foods Company operates a food and beverage company, operating in three business segments: Fresh Dairy Direct, WhiteWave-Alpro and Morningstar. By spinning off its high-growth, high-margin WhiteWave-Alpro and selling its Morningstar segment, DF continues to unlock company value and reduce its leverage. The company appears to be turning around after years of underperformance since 2010. It is a good time for investors to take a look at DF as a turnaround story in consumer defensive sector. DF was up 1.10% and closed at $18.40 on March 14, 2013. DF had been trading in the range of $11.44-$$19.17 in the past 52 weeks. DF has a market cap of $3.42B with a low beta of 0.73.
On March 8, 2013, Stifel Nicolaus upgraded DF from hold to buy with a price target of $21.00. On March 6, 2013, Credit Suisse upgraded DF from neutral to outperform with a price target of $21 from $18. Analysts Robert Moskow said the market is undervaluing the "stub" of Dean Foods, excluding WhiteWave (WWAV).
Analysts currently have a mean target price of $20.67 and a median target price of $21.00 for DF. Analysts, on average, are estimating an EPS of $0.26 with revenue of $2.98B for the current quarter ending in March, 2013. For 2013, analysts are projecting an EPS of $1.11 with revenue of $11.88B, which is 7.90% less than 2012. However, analysts are predicting an EPS of $1.28 for 2014, which is 15.32% higher than 2013.
There are a few positive factors for DF:
- Investing into its brands and focusing on driving cost efficiencies have resulted in improved profitability for DF
- DF has been reducing its leverage to achieve a healthier balance sheet
- Higher revenue growth (3 year average) of 1.0 (vs. the industry average of -11.2)
- Stronger ROE of 125.0 (vs. the industry average of 12.4)
- DF generates an operating cash flow of $440.54M with a levered free cash flow of $233.66M
Technically, the MACD (12, 26, 9) indicator is showing a bullish trend. RSI (14) is picking up and indicating a strong buying momentum at 66.10. DF is currently trading above its 50-day MA of $17.55 and 200-day MA of $16.35. The next resistance is $18.65, the R1 pivot point, followed by $20.71, the R2 pivot point, as seen from the chart below.
How to Invest
Despite the positive upgrades and continuous improvement, DF is currently trading at a fair value (Forward P/E of 13.9, which is the same as the S&P 500's average). DF does not offer dividend, and the revenue is expected to decline in 2013, as compared to 2012. Although there may be some further upside potentials based on the short-term technical trend, the author will remain on the side-line after the recent run-up and will review this stock again if it pulls back to $16-$16.50 range.
Note: All prices are quoted from the closing of March 14, 2013. Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.