Gone are the days when we used to hear about big mergers and acquisitions. If there is one activity that has dominated M&A headlines recently, it is the splitting up of public companies for creating shareholder value. The latest on the list is Kraft Foods, which has recently completed the previously announced spin-off of its North American grocery business, Kraft Foods Group (KRFT). The rest of its international operations was renamed Mondelez International (MDLZ), and retains the snack and food brands, including Cadbury, Nabisco, Oreo, Trident, and Tang.
In this article I will be looking at both the businesses individually to analyze which offers a better investment opportunity.
Kraft Foods Group
After the spit-up, Mondelez's business model requires more cash for reinvestment for growth, while Kraft Foods Group's business will be focused on cost cutting. Rather than helping fund higher growth markets of Mondelez, Kraft Foods Group can now intensify its efforts on growing and restructuring its own business. With a dividend yield of over 4%, Kraft Foods Group appears to be a good fit for income investors. However, the company's high dividend yield comes at a high payout ratio (over 75%) and causes some concerns over its sustainability. Moreover, the company has lower margins than its competitors and the company's valuation multiple (forward PE of ~17x as compared to the peer group average of 15.1x) reflects a premium for the stock. Thus, I would recommend that investors await a pullback before investing in Kraft Foods Group.
Mondelez International enjoys one of the most significant exposures to developing markets across the large CPG players, on par with Coca Cola (KO) and ahead of multinationals such as Nestle (OTCPK:NSRGY). More than 40% of the company's revenue comes from emerging markets in Asia, Latin America and Eastern Europe. If the current growth trends hold, then these markets will constitute 50% of the global packaged food market by 2016. Over the next five years, over 75% of the growth in global food sales is expected to come from emerging markets. Mondelez is number one or two in every category and region where it competes, and thus, I believe the company is well positioned to take advantage of these growth opportunities given its geographic footprint. With a mix of products and geographies, I expect the company to deliver consistent sales and double digit EPS growth.
From a valuation point of view, Mondelez looks highly attractive. Although Mondelez is trading at a premium to its competitors, the company also has a far better growth rate than its peers including Kellogg Company (K) and H. J. Heinz Company (HNZ). Mondelez is expected to grow at an average annual rate of 13% over the next five years, while Kellogg and Heinz have an expected growth rate of just 6.6% and 7.1% respectively. Let's analyze the growth adjusted valuation multiple of these companies.
PEG Ratio (5 Year Expected)
We can see that Mondelez is relatively inexpensive on a PEG basis and offers cheap growth as compared to Kellogg and Heinz.
To sum up, with a strong focus on growing and restructuring its own business, Kraft Foods Group looks well-positioned. Kraft Foods Group's ability to sustain its highly attractive dividend yield of 4.4% is likely to play a strong role in valuation. I think the stock is a little overpriced at the current levels and suggest investors to await a pullback. On the other hand, Mondelez offers an excellent investment opportunity at the current levels. Mondelez International's strong product portfolio and huge international presence will drive strong long term results. The stock also looks cheap on a PEG basis and thus, I recommend buying it.