Mondelez International (NASDAQ:MDLZ) is home to household name brands such as Oreo, Chips Ahoy, Cadbury, Trident, and Halls. It owns dozens of other brands that are more than a century old, which says a lot about the durability of the companies' brands.
On the other hand, the popularity of stores like Whole Foods Market over the last couple of decades says a lot about the times we are living in. More consumers are choosing "healthier" foods, which leaves a lot of uncertainty about how much Mondelez can grow in the future.
Below, I'll review main risk factors facing Mondelez across consumer trends, debt, and valuation for you to consider when assessing the stock's suitability for your portfolio.
Salty and sweet snacks are out of flavor
Competition from natural foods has dramatically slowed down Mondelez's revenue growth in developed markets, especially North America, which has been the toughest market for the Oreo maker. Adjusted revenue grew only 1.3% in 2016, and is not expected to perform any better this year.
Management is playing offense to claw its way back to growth by introducing new, "healthier" food items, such as organic Triscuits, to win back more customers. Those products are helping meet demand for snacks made with "natural" ingredients, and the most recent quarter provides evidence that this strategy is gaining traction.
For the third quarter, adjusted revenue growth accelerated to 2.8%, much better than the revenue decline during the first half of the year. The improvement in the third quarter was driven by growth in emerging markets and strong performance from the company's core brands, as well as healthier innovations like belVita and Ritz Crisp & Thins.
The quarter also highlights that the main culprit for slower adjusted revenue growth continues to be North America, which posted a 3% decline for the first nine months of 2017, which dragged down total growth to just 0.3% for the period. All other regions around the world posted positive top-line adjusted revenue growth.
If you've checked Mondelez's recent stock performance, you're probably wondering how the stock can be up 57% over the last five years given revenue growth has been non-existent.
The answer is margin expansion. Management has been improving the efficiency of their supply chain, and cutting unnecessary costs. The result is that adjusted operating margin has expanded from about 12% to 16% since 2012. Adjusted earnings per share, in turn, have grown 50%, which explains most of the stock's appreciation over that time.
What about the balance sheet
Mondelez had about $13 billion in debt as of the end of the third quarter. On the surface, that might seem like a lot, but this is quite manageable for the company, given its history of generating plenty of free cash flow to pay off debt and still have plenty of capital to reinvest in the business, conduct share repurchases, and pay out dividends. (The stock's dividend is currently yielding about 2%.) Additionally, management has kept a lid on debt over the last several years, as shown in the following table.
|Metric||TTM Through Q3 2017||2016||2015||2014||2013|
|Free cash flow||$1.7||$1.6||$2.2||$1.9||$4.8|
Mondelez's cash on the balance sheet decreased to $844 million this year because of debt repayment and share repurchases. Also, keep in mind, it's quite common for companies to carry a lot of debt that generate consistent revenue from customers making frequent, repeat purchases. As long as Mondelez's revenue and free cash flow don't decline from current levels, I don't see debt as a reason for concern.
Mondelez's trailing price-to-earnings ratio is 37, which is quite high. But that is based on the company's GAAP (unadjusted) earnings, which includes a lot of costs associated with currency fluctuation, and other temporary costs related to divesting assets that do not fit the company's long-term growth strategy.
Excluding these costs, Mondelez trades for 20 times adjusted earnings per share on a trailing-12-month basis. On a forward-looking basis using consensus analysts earnings estimates, Mondelez stock trades for 18 times earnings, which is less than other major food and beverage brands, such as Hershey's forward P/E of about 21, and PepsiCo's forward P/E of about 20.
Mondelez also trades at a discount to the S&P 500's average P/E of 24, but that could be the market's way of factoring in the added risks associated with consumer headwinds impacting food companies these days. The whole thesis for Mondelez revolves around whether the snack giant can navigate current headwinds and reaccelerate top-line growth, which is uncertain, though the company is making efforts in that direction.
For the time being, Mondelez's forward P/E should be supported by margin expansion which is growing earnings much faster than revenue. Analysts expect the company to grow adjusted earnings 10% to $2.14 per share in 2017, as management cuts unnecessary costs out of its supply chain. Eventually, however, Mondelez needs to get revenue growing, since margins can only expand so much over time.