In June of last year, now-defunct Kraft Foods announced that it would split into two companies, a decision that was approved by the company's board in August. As a result, what was formerly Kraft Foods is now Kraft Foods Group (KRFT +0.00%) and Mondelez International (MDLZ +0.36%).
Mondelez International took with it brands that are well-known around 'le monde' and have international market penetration (e.g. Toblerone), while Kraft Foods, concentrating on America, retained big-selling American favorites and household names (e.g. Miracle Whip). Thus Mondelez focuses on snack foods in developing growth markets, whereas the Kraft relies on grocery items in well-known mature markets.
Fundamental figures
In the second quarter, on assets of approximately $72 billion and a market capitalization of $58.67 billion, Mondelez turned a gross profit of $3.2 billion with an operating income of $616 million. The profit margin (ttm) is 6.74%--respectable, but no more.
As of now, with a market cap of $57.87, Mondelez's trailing P/E (trailing twelve months) of 24.61 and forward P/E of 18.90 seen in isolation certainly do not suggest an overvalued stock. However, when one compares it to that of Kraft Foods Group's trailing P/E of 17.35 and Danone SA's trailing P/E of 18.77, it becomes clear that Mondelez is not exactly a sharp value buy.
Mondelez's PEG ratio of 1.74 in and of itself doesn't tell us much. However, the raison d'etre for this company is growth--this being the case, the fact that the PEG ratio is not under the magic number of 1.0 has to raise an eyebrow.
This ratio implies that compared to its P/E ratio Mondelez's growth opportunity, though in no way low, is not exciting. Looking at it another way, the ratio suggests a stock that, for a growth stock, is a little overpriced and not what would be termed a value buy.
Some interesting figures
On the other hand, revenue per share (ttm) at 19.73 is massive and jumps out. On the flip side, for worst-case scenario pessimists, the diluted EPS of 1.32 also jumps out. The difference and ratio between the two may in part be explained by yet a third figure that also jumps out: the company is weighed down by debt to the tune of $18.11 billion (mrq) on a cash pile of $2.69 billion. Furthermore, the debt-to-equity ratio is an eye-catching (and eye-watering) 57.39. Not attractive.
As long as the company continues its ongoing globe-girdling expansion, increases income, and generates cash flow, it can sustain this level of debt. This is because hefty interest payments are required to service a hefty debt. Therefore, no matter how fast the company grows, it needs to keep an eye on its debt and debt-to-equity ratio.
However, we're not talking about a tech company, or even a 'traditional' food supplier (such as grains), so the rules are a bit different. The counterbalance to high debt is forecasted growth.
With these facts and figures looked into, what's the outlook for Mondelez?
A three-point evaluation
First, how would recessionary times in many regions affect this new company's growth in such regions? Well, people buy chocolate in good times – and they positively devour it in bad times (earlier depressions have not seen a downturn in consumer spending on candy; indeed, upticks have been reported). Stress and anxiety – which are constants during depressions and recessions – are well-known snacking triggers, and no matter where in the world a person lives, a bag of chips and a candy bar are usually within means.
Second, Mondelez's outlook based on it particular product line. The company has an exceptional product portfolio with worldwide sales in (very) diverse categories. With so many eggs in so many baskets, not only is there no product-sector vulnerability, there is every possibility for increasing market share somewhere or another.
Third, the company is already working "to reinvent its complex supply chain" to reduce operating costs by over $100 million and, over three years, even add to its liquid assets. All that will have knock-on effects on the company's debt, as a result of which the financials will become stronger.
Third quarter results
Even before Mondelez reported its third quarter results on Nov. 6 it had had some good news in August that had added a few hundred million to its forthcoming Q3 results.
For the third quarter, analysts' EPS expectations were on the high side at $0.41. The best that a realist could have hoped for is that the expectation would be met. As a matter of fact Mondelez did meet expectations, which also resulted in an EPS growth rate of 10.8%.
Operating income increased to $1.3 billion, a sharp rise of 50.6% from the previous quarter. Gross profit, however, dipped slightly to $3.144 billion because of what the company calls "increased investments" (instead of expenses) in advertising, consumer support, etc. Other figures, such as operating margin, are similarly healthy and reflect growth, however small.
Those who had been down on Mondelez's prospects in emerging markets would have been reassured to read that: "Revenues from emerging markets increased 10.7 percent, led by gains of mid-to-high teens in Russia, India and Brazil. . . . The BRIC markets, in aggregate, were up double digits despite China's weak performance."
Summing up
There is no question about Mondelez's capacity to generate income and profits in the long run. The only question is about its stock price now.
If you already own Mondelez stock, the call has to be a strong Hold. But what if you're thinking of plunking down your hard-earned cash on Mondelez? The answer is "it depends." If you're in the market for it as a value investor for the short term then, at around $32, it's a wafer-thin call. Toss a coin or hire a soothsayer. However, if you're a long-term investor building a rock-solid portfolio, then it is an equally rock-solid Buy.
