Comparison Of Mondelez And Want Want China

Summary

The Food industry is poised to see increased demand over the next 50 years because of larger middle class due to increasing standards of living in emerging markets.

Mondelez is well positioned to take advantage of this larger food market if it can find partners and good acquisition targets in Asia and other regions.

Want Want China is a good acquisition target that can provide market access to a big player like Mondelez, and combining both companies will satisfy each other's needs to expand.

Introduction

Mondelez (NYSE: MDLZ) was formed after the demerger with Kraft Heinz (NASDAQ:KHC) in the early 2010s, and it is focused primarily on the international market because it currently generates 30% of its sales in Europe, 40% in North America and 30% in the rest of the world. Mondelez is facing challenges trying to expand its top line sales growth, and even though it is focused on international sales, it is still very solidly profitable in North America, where it recently aborted an acquisition to buy Hershey (NYSE:HSY).

Mondelez is an interesting company to review because it needs to grow its sales all over the world, and it also has an opportunity to make an acquisition in the US because Americans love confectioneries and sugary products. Want Want China (OTCPK:WWNTY), like Mondelez, focuses on casual food - snacks and confectionery business. It specializes in rice cakes and other Chinese snacks and is very China-focused, but it is also strategizing to begin internationalization so as to refocus its markets and provide an opportunity for its profitable growth.

It is not able to grow fast enough because of the slowing of the Chinese economy, and quite frankly, it is facing fierce competition in its home market from Mondelez, Nestle (OTCPK:NSRGY), Kraft Heinz and other local companies. These two companies - Mondelez and Want Want - are in a transitory period, and it will be interesting to review their financials for opportunities for them to strategize going forward.

Overview Of The Food Industry

The global food industry is very complex and involves many participants. It is primarily driven by population growth, and profits are driven by companies and participants that have the right pricing strategy. According to the Food and Agriculture Organization, the world's population will increase to 9.1 billion by 2050. This is about 25% larger than today's population. Thus, in the next 35 years, there will be 2 billion more people to feed.

This means that the food industry is in a period of sustained growth over the next three decades. Also, 70% of the world population will live in urban areas by 2050, which will lead to increased demand for snacks and cakes and other foods consumed by the growing middle class. As shown below, even by 2030, there will be an increased need for wheat. That means that people will demand more wheat-based foods as well. Mondelez and Want Want are perfectly positioned to take advantage of this projected rising demand.

Analysis

Mondelez

Want Want China

PROFITABILITY INDICATOR RATIOS

2015

2014

2013

2015

2014

2013

Gross Profit Margin

38.84%

36.79%

37.14%

43.88%

40.24%

41.55%

Operating Profit Margin

30.02%

8.02%

9.52%

18.83%

18.65%

21.31%

Pretax Profit Margin

26.60%

7.46%

6.78%

22.43%

21.97%

24.46%

Profit Margin Analysis (Net Profit Margin)

24.52%

6.38%

11.09%

15.81%

16.44%

17.98%

Effective Tax Rate

7.52%

13.82%

2.51%

29.55%

25.32%

26.46%

Return On Assets

11.21%

3.14%

5.29%

13.73%

14.55%

17.35%

Return On Equity

26.06%

7.27%

12.11%

28.36%

31.43%

38.29%

Mondelez gross profit margin remained flat from 2013 to 2015 because the cost of raw materials remained about the same during that period. Mondelez operating margin improved significantly from 2013 to 2015 because of the 2014 to 2018 restructuring program to reduce supply chain and overhead costs, and specifically, a reduction in costs associated with the coffee business for Mondelez. Mondelez pretax profit margin increased significantly from 2013 to 2015 because of a one-time gain of $6.8 billion due to the contribution of its coffee business to a new venture, which resulted in its holding a minority stake in the coffee company Jacobs Douwe Egberts.

Note that this coffee transaction also caused its net revenue to drop by 13.5% from 2014 to 2015 because it no longer consolidates its coffee business from its financial statements. Mondelez net profit margin increased from 2013 to 2015 because of a one-time gain from the contribution of its coffee business that is unconsolidated on its income statement. Mondelez tax rate increased from 2013 to 2015 but was lower than the US corporate tax rate of 35% because of reduced taxes due to gains on coffee business transactions and divestitures.

Mondelez return on assets and equity improved from 2013 to 2015 primarily because of its one-time gain on its coffee business, which was discussed earlier. However, eliminating non-operating finance income showed that the operating return on assets was 8%, and the return on equity was 19%. These numbers are still strong and show that the food business in China is more profitable for Mondelez than in the US, Europe and the rest of the world.

This is primarily because the cost of raw materials and packaging and employee wages are much cheaper in China than in the rest of the world. Want Want China's gross profit margin increased from 2013 to 2015 because of a drop in the price of raw materials and packaging in China. Want Want China's operating profit margin declined from 2013 to 2015, primarily because of an increase in the wages of Chinese workers. The Chinese government has gradually encouraged an increase in the minimum wage of Chinese workers, which is affecting Want Want China's operating profit margins.

Want-Want China's pretax margin was flat from 2013 to 2015 but was higher than the operating margin because of non-operating finance income from interest from cash and cash equivalents. Want Want China's net profit margin decreased from 2013 to 2015 because of exchange rate effects due to the appreciation of the dollar versus the Chinese Yuan in 2015, as well as increased employee salaries.

Want Want China's effective tax rate increased from 2013 to 2015 because some of its earnings in China were transferred to its overseas holding company and thus were charged a higher tax rate, causing its effective tax rate to increase to 29%. Want Want China's return on assets and equity decreased because of reduced profitability, as discussed earlier, but remained very strong, in the double digits.

Key Insights

Mondelez is a very profitable firm that is already internationally focused but has hit a plateau in its international growth strategy. It will need to introduce products such as Triscuit and Chips Ahoy to customers in Africa and Asia. Mondelez will be able to do this because it has sufficient profits from its current operations to engage in some growth market initiatives. The biggest markets for Mondelez are China, India and Nigeria, which have a combined 600 million middle-class customers that can take on new products.

For Mondelez to effectively implement this strategy, it will need to depend on its recent acquisition of Cadbury to use its existing distribution channels to introduce products that are already popular in North America to these 600 million new middle-class customers. As a result of the cost of introducing these products, Mondelez will see a dip in its net profit to 2 to 4% in the first five years of expansion into these markets if it chooses to pursue this strategy but it will increase profits over the long term.

If Mondelez doesn't make a move like this, its other option is to buy Want Want China or a similar company and expand with local brands rather than introduce global brands. If Mondelez doesn't act quickly in the next 2 years, it will be a takeover target by aggressive Kraft-Heinz, which is backed by Warren Buffett, or established global players such as Nestle and Unilever (NYSE: UL).

The reality is that with the big market available for Mondelez and its competitors in the food industry, change is coming fast, and for Mondelez to remain a key player, it needs to move fast or risk being part of a more aggressive competitor as part of a takeover target. Mondelez needs to act now and act quickly to seize the market for new middle-class consumers.

Mondelez

Want Want China

INVESTMENT RETURN

2015

2014

2013

2015

2014

2013

Price/Book Value Ratio

2.48

2.24

1.95

4.73

9.46

11.22

Price/Cash Flow Ratio

18.66

17.43

9.85

11.23

23.03

26.76

Price/Earnings Ratio

9.57

28.43

16.13

16.27

31.24

31.75

Price/Sales Ratio

2.35

1.81

1.79

2.57

5.13

5.71

Dividend Yield

1.45%

1.55%

1.49%

2.83%

1.29%

1.49%

The price to book value ratio for Mondelez increased from 2013 to 2015 because of slightly increased stock price and reduced equity. The reduced equity was because of the $7.7 billion share repurchase program that Mondelez instituted in 2012. Mondelez price to cash flow ratio increased from 2013 to 2015 because of the drop in operating cash flow due to lower working capital. Mondelez price to earnings ratio decreased from 2013 to 2015 because its profit increased, mostly due to the sale of its coffee business in 2015.

Due to the big gain by Mondelez from the sale of equity in its coffee business, it appears cheaper than Want Want China on a price to earnings basis. It really is not that much cheaper than Want Want China, and its adjusted price to earnings ratio without this one-time gain is in the double digits, like that of Want Want China. Mondelez price to sales ratio increased from 2013 to 2015 solely due to its increase in stock price because its reported consolidated sales dropped due to removal of revenues from its coffee business.

Mondelez dividend yield remained flat from 2013 to 2015 because management did not pass to shareholders any additional dividend due to its one-time earnings from the sale of the equity in its coffee business. Want Want China's price to book value ratio reduced from 2013 to 2015 because of reduced revenues and profits due to decreasing demand for its dairy products and increased demand by Chinese consumers for foreign foods as incomes rise.

The income rise in China somewhat portends an increase in sophistication of the Chinese consumer and the need for foreign foods. Want Want China's price to cash flow ratio decreased from 2013 to 2015 because of decreased profitability. Want Want China's price to earnings decreased because of the drop in its earnings, which was discussed earlier.

Want Want China's price to sales ratio dropped from 2013 to 2015 because of its drop in stock price, which was driven by a drop in sales and profits. Want Want China's dividend yield increased from 2013 to 2015 because its stock price dropped, so shareholders appeared to be getting a better deal, but not by much because it was only a 2.83% yield.

Future Outlook

Mondelez has a global portfolio of food products and is well positioned to take advantage of expansion of tastes in Asia and other emerging markets. Though Mondelez is well positioned for these markets, it has not capitalized on these opportunities. Mondelez needs to buy another food producer in Asia to increase its market share and then use the market reach of this player to grow its business. Mondelez is not likely to increase its earnings significantly in the next three years unless it makes a major acquisition overseas in Asia or other emerging markets, so its price to earnings ratio over the next three years will remain at about 9 to 12.

It is not likely to create value for its shareholders. Want Want China's sales are declining due to its inability to innovate into new products, and its portfolio is stagnant and stale, so its price to earnings ratio is likely to drop to 8 over the next three years.

It is a good candidate for takeover by a global food giant such as Mondelez, Nestle or Unilever. Its market value will continue to drop because local Chinese are increasing in sophistication and wanting to try imported foods, so if Want Want can combine with a global food giant, it will be a win-win, where it will provide market access to a global player in the greater China region - Mainland China, Hong Kong and Taiwan - and at the same time, it will be able to introduce its snacks to other markets with significant Chinese populations, such as the United States, Canada, Malaysia and Singapore.

Want Want's 3-year outlook is not looking good, and its stock price will continue to drop to cheap value territory. It is currently not a buy for a value investor because its fundamental business is shrinking.

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.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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