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Mondelez International, Inc. (NASDAQ:MDLZ) has reported its 1Q'13 and has managed to beat the analysts' expectations with the earnings surprise of 3.00%. However, the growth was hampered by the capacity constraints and deflation of coffee prices. Moreover, the gum and candy segment (15% of sales) did not performed well and it contributed negatively to the overall growth. The company's Chairman and CEO Irene Rosenfeld herself said: "Although we're not satisfied that our top-line growth remained below our long-term target, our results show that we've built solid underlying momentum. And I'm confident that we'll deliver our 2013 commitments as we continue to leverage our advantaged category mix, leading market positions and strong geographic footprint, particularly in emerging market."

MDLZ has one of the largest snack businesses in the world. With annual revenues of $35 billion, the company operates in around 165 countries all over the world. Some of the key brands are Cadbury, Oreo, Milka, Tang, LU biscuits etc

Key Highlights of Financial Performance

  • The company experienced a growth rate of 3.8% in net organic revenues, which includes a contribution of 2.5% from the volume mix and 1.3% contribution from the price mix.
  • Developed market experienced a modest growth of 0.4%. The gum category is continuously on the decline where as the Stride performed well in the first quarter.
  • Emerging markets grew with an astonishing rate of 9.3%. This growth was primarily attributed to the strong results in BRICs countries especially the launching of Stride in China.
  • Gross Profit raised by 1.5% and reached to $3.2 billion.
  • Operating income decreased to 7.6% and reached to $0.8 billion and much of it was attributed to the devaluation of the Venezuelan currency.
  • Advertising and consumer's spending contributed 9.6% of the revenue.
  • Power brands continued to be the focus of growth and raised by 7.5%.

Margin Expansion

The company has an immense potential to drive growth through margin expansion as the margins are suppressed when compared to its peer companies. I believe that with the improvement in the supply chain, proper infrastructure and cost efficiency techniques these margins will eventually improve especially in western Europe and developing economies.

Company

Profit Margin

Operating Margin

Kellogg Company (NYSE:K)

6.30%

11.41%

The Hershey Company (NYSE:HSY)

10.45%

18.53%

General Mills, Inc. (NYSE:GIS)

10.41%

16.78%

MDLZ

7.93%

11.76%

Source: Yahoo Finance

Valuation

Forecasted Earnings

P/E Multiple

Price

Bearish case

$1.52

18.6x

$28.27

Bullish case

$1.60

18.6x

$29.76

The company raises its EPS guidance to $1.55-$1.60, which is just the bullish case so we can safely say that the company is slightly undervalued. Revenue synergies along with the restructuring efforts will help them to achieve this target. The company also continued to focus on its power brands. Moreover, MDLZ is also focusing on devising new pricing strategies, resetting the shelves and revisiting marketing strategies for some core brands. Emerging markets will continue to be major growth driver for MDLZ confectionery business because of low per capita consumption level and rising average income. The graph below shows estimates share of global packaged food. Moreover, there are plenty of white spaces available in these markets which can help to grow its market share.


(Click to enlarge)

Source: Goldman Sachs Research Estimates

Risks

Weak macro economic conditions in U.S. and Europe could continue to hurt the business. Rising commodity prices would eventually make it difficult for the company to transfer the cost to the consumers in a competitive environment. The company efforts to increase its investments in emerging markets and other strategies might fail and they end up spending lot of money without yielding any benefits. Lastly, the company may also face the risk of depreciating foreign currency.

Conclusion

Companies

Dividend Yield

Next 5 yr growth rate per annum

PEG ratio (5 yr expected)

Kellogg Company

2.80%

7.74%

2.12

The Hershey Company

1.90%

9.50%

2.49

General Mills, Inc.

3.10%

7.78%

2.30

MDLZ

1.80%

11.46%

1.60

Source: Yahoo Finance

It can be inferred from the table above that the company does not have an attractive dividend yield but this can be compensated by the highest growth rate per annum of next five years and lowest PEG ratio among its peers. Investors are presented with strong entry point at $28.58 into MDLZ shares among its peers.

Source: Mondelez International: Highly Attractive Long Term Growth Prospects