Description

Summary

I believe Mondelez (MDLZ) is an attractive long investment on a standalone and relative basis.  The company’s fundamentals are beginning to stand out versus packaged food / consumer staples and should drive an improved valuation.  The stock is effectively flat in 2018 and down ~4% since the beginning of 2017 (XLP +4%) despite solid earnings growth. MDLZ’s NTM P/E multiple has contracted to 17x EPS from 21x EPS at the beginning of 2017.

MDLZ has been written up twice on VIC: Orion in December 2017 and jgalt in August 15.  I suggest reviewing those write-ups for background and context.

Key Investment Points

• MDLZ has an advantaged product portfolio and geographic footprint versus peers.

• The company’s Q2 report points to accelerating organic revenue growth and margin improvement.  This combination is rare in packaged food / staples.

• MDLZ has de-rated over the past two years.  Its valuation is attractive on a standalone and relative basis.

MDLZ differentiates itself from peers with its snacks focused portfolio and ex. North America geographic mix.  Approximately 75% of FY2017 revenue was ex. North America and nearly 40% was emerging markets. In Q2 2018, MDLZ grew +2.6% in DM and +4.7% in EM.  Both growth rates stand out given most other packaged food companies are struggling for flattish top line growth. In addition, MDLZ should be able to drive incremental revenue growth from bolt-on acquisition such as Tate’s Bake Shop.  Plugging Tate’s into MDLZ’s DSD should provide a long runway for distribution growth. In May, Dirk noted he expects the brand to be 3-4x larger in 5 years.

MDLZ’s Q2 2018 report demonstrated accelerating organic revenue growth and margin expansion.  This is a rare combination in consumer staples given the increasing need to reinvest to drive growth.  Most companies are experiencing gross margin pressure due to higher input costs, required trade promotion and a more challenging pricing environment.  MDLZ benefits from structurally higher growth end markets. Based on MDLZ’s latest presentation, snacks category growth as accelerated to 3.1% in 2018 YTD (2-2.5% in 2016 and 2017).  EM is nearly 40% of total revenue and growing at a structurally higher rate than developed markets.

The margin improvement is notable considering the +600 bps operating margin expansion between 2013 and 2017.  I think margin expansion going forward will be much more measured given the focus on organic revenue growth. However, benchmarking MDLZ’s cost structure and plant efficiency suggests continued operating leverage with revenue growth.  Bernstein has published on this topic.

MDLZ has de-rated over the past 2-3 years.  Multiples were inflated in 2016 as rates bottomed and KHC’s M&A aspirations drove up valuations.  MDLZ is now trading at 17x NTM EPS with a 2.5% dividend yield. I believe this is attractive given MDLZ’s growth (2-3% organic rev, HSD/LDD EPS growth), margin / return profile and strategic optionality (KDP / JDE coffee investments, potential divestments or M&A target).  KDP is now publicly listed and MDLZ owns 13.8% of the company. MDLZ plans to address its coffee investments, among other strategic items, at its upcoming investor day. The company is also trading at a near 3 year low versus consumer staples - 0.94x compared to 1.03x historically.

MDLZ NTM P/E -

MDLZ NTM P/E relative to consumer staples -

MDLZ is hosting its first investor day under Dirk Van de Put on September 7th.  As a reminder, Dirk was appointed CEO in November 2017 (August 2017 announcement).  This will be his first formal opportunity to outline his strategic vision for the company.  MDLZ is transitioning from a restructuring / margin expansion story to a more balanced organic revenue growth / margin investment.  In my opinion, this has led to some uncertainty around the cost (i.e. margin tradeoff) for accelerating organic revenue growth. I think providing a clear framework around this tradeoff should help MDLZ’s valuation.

The investor day will also be an opportunity to hear from the new CFO.  Brian Gladden, MDLZ’s former CFO, was well respected and key in leading MDLZ’s restructuring over the past several years.  Luca is not well known to investors but has significant finance and ex. North America experience. It is possible this is a signal that Dirk plans to focus on international and intends to leverage Luca’s experience.

Luca Zaramella

Over the past four years, Luca has assumed a range of responsibilities to prepare him for this role, including Corporate Controller, Treasurer and global head of Financial Planning & Analysis. Zaramella has served as MondelÄ“z International’s Senior Vice President of Corporate Finance since 2016 and was the Senior Vice President and Corporate Controller from 2014 to 2016. Prior to that, he was Senior Vice President, Finance of Mondelez Europe. He began his career with the company in Italy before holding positions of increasing seniority in Latin America, Europe and North America.

https://ir.mondelezinternational.com/news-releases/news-release-details/mondelez-international-names-luca-zaramella-chief-financial

In closing, I think MDLZ represents a compelling risk reward at this level.  Downside should be limited by MDLZ’s absolute and relative valuation to peers while the company should re-rate as investors become more comfortable with the sustainability of MDLZ’s organic revenue growth and margin balance.

Risks

• MDLZ has significant ex. US exposure and is not immune to FX, EM and geopolitical risks.  Most multinational peers have de-rated given these headwinds while US centric peers have re-rated.

• MDLZ operates in an attractive category (snacks).  This is good and bad. The good is obvious but the bad is that attractive categories are becoming more crowded and competitive.  The well documented pressures in core US food are pushing companies into pet, coffee and snack categories.

• Dirk is still relatively unknown.  He did a good job at McCain but benefited from an improving end market cycle.  MDLZ is unquestionably a larger and more complex company.

• The company has improved margins over the past several years.  It is possible that accelerating revenue growth will have a higher cost and therefore require a margin reset (or at least less margin expansion that people are expecting).

Catalyst

Investor day on 9/7.

Sustained organic revenue growth.