Strong Growth Reaffirms A Buy For Mondelez

I reaffirm my bullish stance on Mondelez International (NASDAQ:MDLZ). The company has a significant emerging market exposure, which is expected to fuel growth for the company. Top line for the company is estimated to grow at 5%-7% and bottom line is anticipated to expand in double digits in the long run. Analysts are projecting a healthy next five years growth rate of 12.5% per annum. Therefore, I reiterate my buy rating on the stock.

I continue to believe MDLZ is a good investment opportunity. The company has been spending aggressively on advertisement to tap the market and grow its share across global markets and to achieve its long-term growth objectives.

Last month MDLZ reported its first-quarter 2013 financial results; registering net revenues of $8.7 billion, an increase of 3.8% year on year basis. The increase in revenues was mainly driven by improved performance of 'power brands,' which grew 7.5% for the quarter. Emerging market growth and volume gains also contributed positively toward top line growth. Emerging market revenues grew by 9.3% for the quarter on a year-on-year basis. Top line growth for 1Q 2013 was adversely affected by lower coffee prices, currency headwind and capacity constraints.

Adjusted earnings for the first quarter were $0.34 per share, in line with analysts' expectations, up 22.6% YoY on a constant currency basis. The increase in the earnings was mainly driven by a lower tax rate, which is reduced to 18% for 2013 and 2014. Management indicated the tax rate will reverse in 2015 and is likely to be 25% thereafter.

Impressive growth in emerging markets was led by double-digit growth in BRIC markets. On the other hand, developed markets grew at a slow pace of 0.4%, negatively affected by a weak gum market and lower coffee prices.

Chewing gum sales for MDLZ have been declining in the recent quarters. In 1Q 2013, chewing gum sales were down 3%-4% following an approximately 2% decline in 2012. Chewing sales are not expected to improve in the current year, 2013; however in the long run due to strong developing markets footprint analysts are anticipating 6% to 7% growth in chewing gum category of MDLZ.

The company reaffirmed its 2013 organic net revenue growth target in the lower end of the 5%-6% range. However, MLDZ raised operating earnings per share guidance to $1.55 - $1.60 per share. MLDZ also indicated that capacity constraints and lower coffee prices will continue to be headwinds for top line growth in the ongoing second quarter. Analysts are anticipating MDLZ to earn $0.37 per share for the 2Q 2013 and $1.57 per share for full year 2013.

Other than expected impressive growth rate in the long run, the company offers a modest dividend yield of 1.80%. Recently MDLZ declared quarterly dividends of $0.13 per share, an annualized rate of $0.52 per share. The dividend is payable on July 15, 2013.

Given the strong growth prospects, I believe the stock is currently undervalued at current valuations. Using the historical median P/E of large U.S. food companies of 16.5x (and applying a 10% premium to median P/E of 16.5x) and analysts EPS forecast for 2014 of $1.75, I calculated the a target of $31.8 per share for MDLZ.


Target Price

P/E * EPS = Target Price

18.15x * $1.75 = $31.8

My price target of $31.8 per share, provides investors an upside potential of 8.5%. Coupled with dividend yield of 1.8%, the stock offers potential total return of more than 10%. Therefore I believe the stock is a buy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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