Mondelez International Is an Attractive Growth Story

Mondelez International (MDLZ 0.79%) has a solid product portfolio and holds a dominant market share in the snacks category. The company is likely to benefit from its large international market exposure and underappreciated margin opportunities. In the medium-to-long term, Mondelez is likely to experience mid-single digit sales growth and double-digit earnings growth, which makes it one of the top growth stories in consumer staples, even compared to competitors like Kraft Foods (KRFT.DL).

Diverse geographical footprint
Mondelez generates more than three quarters of its total sales from international markets and about 40% of sales from fast growing emerging markets. The large emerging market exposure is likely to remain an important sales growth driver for the company mainly because of a increasing population and a growing middle class. Also, the company is hoping to improve and expand its retail exposure in emerging markets to benefit from the available opportunities in the snacks category. Mondelez has 75% business exposure to the snacks category, which is an attractive food category within packaged food, because people can afford more snacks as their incomes grow.

Margin expansion potential
Other than large emerging market exposure, the potential to expand margins and efforts to become a low cost producer remain important earnings growth drivers. Mondelez currently has lower margins in contrast to its competitors. Mondelez has an operating margin of 12% and a net margin of 7.7%, whereas its competitor The Hershey Company has an operating margin of 19% and a net margin of 11%, while General Mills has an operating margin of 17% and a net margin of 10%.

The company has been consistently working to make its cost structure leaner, and improve both productivity and margins. In 2012, Mondelez announced a two-year restructuring plan in efforts to lower its costs. As the 2012 restructuring program is set to expire in 2014, the company recently approved another $3.5 billion restructuring plan for the next four years to achieve best-in-class cost levels and accelerate margin expansion. The new plan is expected to result in annual cost savings of $1.5 billion by 2018 and annual net productivity improvement of 3% of cost of goods sold (CGS), up from the previous target of 2.3%.

Efforts to make the cost structure leaner are mainly directed toward the tightening of overhead costs through zero-based budgeting and accelerating supply chain reinvention and cost reduction programs. Consistent with its aggressive initiatives to reduce costs, the company also revised its operating income margin range to 16%-15%, up from the previous target of 14%-15% by 2016.

Stays on track
Initiatives undertaken by the company in the recent past to expand margins seem to be track as the company has been successfully expanding its margins. The table below displays operating and net margin expansion enjoyed by the company in the first quarter of 2014, as compared to the corresponding period last year.

The cost savings derived through the restructuring program will help the company to not only expand margins, but also reinvest savings to strengthen its product portfolio and further expand its international exposure to tap the opportunities available in fast growing emerging markets.

Cost reduction efforts continue
Since its spin-off in 2012, Kraft Foods has also been working to expand its margins and attain low-cost producer status. Kraft has lower margins in contrast to its competitors; currently Kraft has a gross margin of 34.5%, as compared to Hershey's and General Mills' gross margins of 46% and 40%, respectively. Kraft has been aiming to achieve margin expansion through improvement in supply chain and reduction in overheads. Supply chain productivity improvement offers more opportunities to reduce costs, as the company shuts down inefficient plants and opts for strategic distribution contracts. Kraft has been aiming to achieve net productivity improvement of 2.5% in the long term. Also, the company is expected to reinvest cost savings to support product innovation and brand building measures, which will bode well for its long term performance.

Colgate Palmolive (CL 0.33%), just like Mondelez, is another company with large international and emerging market exposure working toward lowering its costs. Colgate generates about two quarters of sales from fast growing emerging markets, where its performance stays solid, evident by an impressive 10% YoY organic sales growth in the first quarter of 2014. Colgate has been working on 'funding the growth' program to further strengthen its dominance in markets and expand its operations to cater to the growing demand in emerging markets. Overhead cost controls, and enhancing manufacturing and distribution efficiencies are being targeted by Colgate to reduce costs. Also, Colgate is expecting 75-125bps gross margin improvement for 2014, consistent with its cost control measures.

Final Take
Mondelez has the potential to experience above-industry average growth in the future because of its large emerging market exposure and potential to expand margins. The company has lower margins in the industry, which indicates a strong upside potential. Also, the company's recent four-year restructuring program will accelerate gross margin expansion and provide more confidence to investors in Mondelez ability to achieve its margin expansion targets.