Mondelez: Moving Ahead Despite Challenges

Summary

Company needs to focus more on product innovation, by concentrating on healthy snacks categories.

Company has potential to drive margin expansion and earnings growth in the near-term through its cost saving measures.

Stock is trading at a forward P/E of 20.8x, in line with its peers average forward P/E of 21x.

Mondelez International (NASDAQ:MDLZ) has a strong product portfolio and holds dominant market share in different product categories. The company has been facing challenges to grow its top line numbers due to changes in consumer eating preferences and competition in the market. In the near-term, the company will continue to experience weak revenue growth, and to fuel its long-term revenue growth it needs to focus more on product innovation and expanding its international footprint. However, in the near-term, the company will be able to offset revenue pressure and grow its earnings through cost reduction measures, which will not only provide earnings visibility but also allow the company to generate strong cash flows and reward shareholders through cash returns. As the company will continue to achieve its margin expansion target and address challenges in the international markets, the stock valuation will expand.

Financial Performance and Catalysts

Mondelez reported satisfactory financial results for 2Q16, despite the fact that global category growth remains weak. The company reported EPS of $0.44 for 2Q16, beating the consensus estimate of $0.41. Better than expected bottom line results for the quarter reflects that MDLZ enough potential to achieve its margin expansion target through streamlining its cost structure. Also, for 2Q16, the company's organic revenues increased by 1.5%, driven by a price increase of 1.6%. The company updated its guidance for 2016, and now expects organic revenue growth of 2%. Also, it expects an adverse currency impact of 4% on revenues, higher than prior expectation of 3%. I believe, to offset the impact of foreign currency headwinds, the company will increase prices across its product portfolio, especially in emerging market, which will put pressure on sales volume in the near-term.

In the recent quarters, the company revenues have been challenged due weakness in snacks category, owing to changes in consumer eating preferences and competition in the industry. I believe the company has the expertise and financial strength to address the challenges and fuel its long-term revenue growth. MDLZ should focus more on new product launches, mainly targeting healthy snacks category, which is consistent with consumer demand. Also, focusing on healthy snacks will allow the company to address the problem of less shelf space provided by some retailers due to shift in consumer tastes. Moreover, the company needs to increase its advertisement and promotional activities to address competition and support its sales volume. The company currently has advertisement spending as a percentage of revenues of almost 9%, which it can increase to 10% to address competitive pressures and support snacks category growth.

Moreover, the company needs to focus and target major emerging markets, including China and India, which offers huge growth potential, to fuel its revenue growth. The company correctly plans to enter China's $2.8 billion chocolate market by introducing Milka brand in September, which will not only allow it to tap the available market opportunities but also compete with Hershey's (NYSE:HSY) chocolate business in China. The company's product innovation and international expansion efforts will support its long-term revenue growth, and in the near-term, its earnings growth will be driven by cost savings measures. The company is aggressively working to improve its cost structure and expand its margins. The company seeks to reduce its costs by improving supply chain efficiencies, reducing overheads and implementing zero-based budgeting, which will expand its operating margin by 300bps to 400bps by 2018. The cost savings will not only allow MDLZ to expand profit margins and fuel EPS growth but will allow it to reinvest savings to support revenues and market share growth.

Moreover, MDLZ can increase its bid price to $120 per share to acquire HSY, after HSY rejected the bid of $107 per share. However, to complete the deal, MDLZ will need to get approval from Hershey Trust and the Attorney General's office of Pennsylvania. If MDLZ goes ahead and increases the bid price to acquire HSY, through equity financing, I believe the company can increase its cost savings targets which will boost its stock price.

Summation

MDLZ has a dominant market share in different product categories. However, the company needs to focus more on product innovation, by concentrating on healthy snacks categories, consistent with consumer demand to support revenue growth in the long-term. Also, the company needs to increase its advertisement and promotional spending to address ongoing challenges in the industry. Despite the ongoing challenges, the company has potential to drive margin expansion and earnings growth in the near-term through its cost saving measures. As the company will continue to achieve its cost saving targets, its stock valuation will expand. And once the company's efforts to fuel its revenue growth will start to pay off, the stock will trade at premium valuations to its peers. Currently, the stock is trading at a forward P/E of 20.8x, in line with its peers' average forward P/E of 21x.

Disclosure: I/we 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.