Mondelez: Expected Top-Line Growth And Margin Expansion Highlights Of Bullish Thesis

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Cost saving efforts will positively affect margins and bottom-line growth.

Price increases undertaken by company will offset impact of increase in commodity costs.

Analysts anticipating healthy next five years growth rate of 13.07% per annum.

I am bullish on Mondelez International (NASDAQ:MDLZ); the company has been working on product innovation and productivity enhancement initiatives, which I believe will portend well for its growth. The company's efforts to reduce overheads and improve productivity seem to be on track and are positively impacting its margins. Also, the company's large international market exposure will support its future financial performance. Recently, in response to an increase in commodity costs, the company increased the prices of its products, which I believe will help the company support its top-line growth.

MDLZ moving ahead
MDLZ has been consistently making efforts to grow its top-line growth through product innovation initiatives and expansion in international markets. The company has a strong product portfolio and large distribution network to support its expansion in international markets. As the company has a large international market exposure, adverse currency movements remain a drag on its top and bottom-line growths.

To address the competition and keep up with changing consumer demands, the company has been focusing on product innovation. MDLZ recently showed interest in buying a patent for the production of a fat reducing chocolate technique. Given the increasing demand for low-fat food, other companies like General Mills (NYSE:GIS) are also introducing low-calorie products, like gluten-free cereals. I believe that if MDLZ acquires the new technique patent, it will be able to cater to the low-fat food demand and address competition in the industry, which will increase its market share and expand its revenue base.

To strengthen its market presence and product portfolio, the company announced in 2Q14 to merge its coffee operations with Master Blenders. Currently, MDLZ controls 10.9% and Master Blenders has 5.4% of the global coffee sales. The new joint entity is expected to have a notable market share of 16.3% of global coffee sales. Also, the new joint entity will effectively compete with Nestle, the world's leading coffee company, who controls more than 22% of the global coffee market.

Moreover, the company has been aiming to increase its international market exposure, which will help the company cater to the available growth opportunities in different product categories. The categories offered by MDLZ are globally growing at 3.8%, higher than the company's organic sales growth of 2%. The global category growth, which is higher than the company's organic category growth, presents opportunities for MDLZ to grow its top-line growth at a faster pace. I believe the company's product innovation and market expansion efforts will allow it to tap the available growth opportunities, which will positively affect MDLZ's future performance. The following table shows the global category growth and MDLZ's organic revenue growth for different product categories and total portfolio.

Source: Company's Quarterly Earnings Report

A rise in commodity costs, like the prices of cocoa, dairy and coffee, remains a drag on the company's margins. Recently, in response to an increase in commodity costs, the company increased the prices of its products. The price increases might put pressure on the volumes of the company in the near term, but will portend well for top-line growth and support its margins. In 2Q14, the company reported organic sales growth of 1.2% year-on-year, mainly driven by price increases; price increases had a positive impact of 3.6% on organic sales growth in 2Q14. However, sales volume was down 2.4% year-on-year in 2Q14, mainly due to price increases undertaken by MDLZ to offset the impact of the rise in commodity costs.

Margins and the Bottom-Line
The rise in commodity costs adversely affected the company's gross margin in 2Q14. MDLZ's gross margin dropped from 37.8% in 2Q13 to 36.9% in 2Q14. However, I believe the price increases undertaken by MDLZ to address the rise in commodity costs will positively affect its gross margin in the coming quarters. Also, the company has been undertaking productivity enhancement and cost saving measures, which will support its margins in the future. The company's supply chain management efforts to reduce costs seem to be on track. The company has successfully lowered its selling, general and administration [SG&A] expenses by more than 10%. Also, in 2Q14, the company's operating margin increased by 120 basis points due to its cost saving efforts.

Due to its cost savings efforts, the company expects its adjusted operating profit margin to be 12% for FY14. Also, MDLZ expects its EPS to be in a range of $1.73-$1.78 in FY14, as compared to an EPS of $1.54 in FY13.

I believe MDLZ will deliver a healthy financial performance in the future. The rise in commodity costs has adversely affected the company's gross margin in 2Q14; however, I believe the prices undertaken by the company will offset the impact of price increases and positively affect its top-line growth and gross margin in the future. Also, the company's cost saving efforts will positively affect its margins and bottom-line growth. Moreover, the company's product innovation efforts and international market expansion efforts will portend well for its market share and future growth. Given the attractive growth opportunities for MDLZ, analysts have anticipated a healthy next five years growth rate of 13.07% per annum. Due to the aforementioned factors, I am bullish on the stock.

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