We are bullish on Mondelez International because of its expected top line growth of 5%-7%, expected low to mid-double digit EPS growth rate and cheap PEG of 1.35. The company has significant emerging market exposure that will act as a catalyst for growth. By 2015, emerging markets are expected to contribute 50% to total revenues. We recommend buying the stock.
Mondelez International Inc. (NASDAQ:MDLZ) was formerly a part of Kraft Food Inc (KFT). Kraft Food spun-off its business in North America, which is now known as Kraft Foods Group (KRFT). Kraft Food's split is expected to increase shareholder value as both companies will focus on their businesses more deeply and efficiently. Mondelez International started trading on October 2, 2012.
Mondelez International's brand portfolio includes famous brands like Oreo, Cadbury, LU, Milka and Chips Ahoy. It is a worldwide leader in chocolates, biscuits and candy markets. It also enjoys a dominating position in gum and coffee markets. A strong brand portfolio and diversified geographical revenue base translates into a unique position and tremendous growth opportunities for the company. The company is expected to grow its top line at a decent and steady rate of 5%-7% in the coming years. 75% of its revenues are expected to be generated from chocolates, biscuits and gum markets. As the company has significant international exposure, the strengthening of the dollar is expected to decrease its top and bottom line. It is estimated that changes in currency rates will reduce the company's earnings by 15 cents per share in 2013.
Mondelez is expected to earn approximately $36 billion a year, and has operations in more than 80 countries. Mondelez has a significant, and growing, emerging market exposure. 44% of the total revenues of the company are expected to be derived from emerging markets. Emerging market revenues are expected to increase in the coming years as world population increases and the global middle class expands.
The company segregated its markets in to three groups; BRIC market, Next Wave and Scale markets. BRIC markets make up around one-third of total developing market revenues, and these markets are expected to grow in the mid to high teens in the next five years. Next Wave market, which includes markets like the Middle East, Africa and Indonesia, is also expected to grow in mid to high teens, and contributes nearly 12% of total developing market revenues. Scale markets are expected to grow in low to high single digits, and contribute almost 25% of total developing market revenues.
The snacks business has an estimated potential market of $60 - $80 billion, which provides great growth opportunities for Mondelez in the long term. India is one of the most important markets as it offers an attractive growth opportunity with a snack market that is expected to grow at a rate of 15% - 20%.
Mondelez International's earnings guidance for next year i.e. 2013 is $1.50 - $1.55 per share. The company plans to explore new markets for its products, along with, coming up with new products to increase its market share. The company is working on newer technologies so that it can offer products, suitable for different regions, for example, more heat resistant chocolate for hotter climate regions. The company has strong brands, which will help the company increase prices, in order to offset the impact of a rise in commodity prices. This will ensure that the company expands and maintains its margins.
The company will focus on organic growth to expand its operations. Meanwhile, it will also work towards acquisitions, for growth in emerging markets. Last month before the spin-off, Kraft food signed a deal to acquire full control of Bimo, a cookie maker in Morocco. Prior to the deal, Kraft had a 50% stake in Bimo. The deal is expected to be completed in early 2013, and is subject to regulatory approval. If the deal is approved, it would help the company have a strong position in Morocco's cookies market, as Bimo has a market share of 13%.
The company is expected to pay dividends of 0.52 cents to 0.55 cents per share, which makes a dividend yield of almost 2%. This is an attractive yield, as the stock also offers attractive low to mid double digit growth in the coming years. The company is expected to have a free cash flow of almost $1.75 billion and dividend payments of almost $950 million in the coming years. This represents that the company will be able to maintain dividends going forward. In 2013, $3.5 billion of debt is expected to mature, while the company is expected to reduce its outstanding debt by $2 billion.
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Expected 5 years Growth rate
Source : Yahoo finance and Qineqt's estimates
Mondelez International's forward P/E of 17.5x is at a premium compared to its competitors. HOwever, the forward P/E multiple is supported by the company's high growth rate of 13%. Its PEG of 1.35 indicates that it offers cheap growth as compared to its competitors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by Qineqt's Staples Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.