After posting new 52-week highs back in July, Mondelez International (NASDAQ:MDLZ) stock has been in a bit of a tailspin since management lowered its outlook for organic revenue growth with its second-quarter earnings report. Here are three things that might get the maker of Oreos heading back to its sweet highs.
Reason 1: Under promise, over deliver
Sometimes, bad news is good news when it comes to the stock market because, going forward, the bad news is (hopefully) priced in. For the second-quarter report, Mondelez tempered its revenue growth guidance for the full year to between 2% and 2.5% compared to 3% previously due to "slower category growth and temporary pricing-related dislocation."
At the same time, the company reiterated its adjusted EPS target of between $1.64 and $1.69 per share, despite the slight setback in sales growth. This is only possible with higher profit margins, which should be longer lasting, and set the stage for possible earnings results or an outlook to surprise to the upside, especially as the temporary problems start to ease. Mondelez backed this long-term confidence with a 7% dividend raise.
Reason 2: Sustainability and well-being
In our new Chipotle world, we are becoming more and more concerned about the type of food we eat. Many times we're more concerned about where our food came from and what's in our food than we are about how many calories, fat, or carbs are in there. As an example, as I write this, Wal-Mart announced a new commitment to food sustainability that promotes the well-being of farmers and consumers. CEO Doug McMillion put it well by stating in a press release,
Grocery is a very personal category – it's about what you feed your kids and how you take care of yourself. It's about your health and wellbeing. And it all comes down to trust. ... When we focus on food, we are doing right by our customers, our communities, and our planet.
Reason 3: Cocoa costs stabilize
What a scary world we live in with such terrible diseases as Ebola. Collateral damage for investors is coming in the form of higher prices for cocoa, which is the key ingredient in chocolate. Speculative fear of supply disruptions lifted cocoa prices to a three-year high. Mondelez's stock price may have been weak lately in part due to this. According to a report by ABC News, around 70% of the world's cocoa supply comes from Ebola-hit West African nations.
The good news is that there was already price inflation in chocolate, and Mondelez has been able to pass much of that inflation to consumers. Rosenfeld mentioned in the conference call that cocoa inflation has "required us to take significant price increases especially in chocolate." If cocoa costs subside, and the panic eases over potential supply disruption, it should help lead to higher profit margins and ease investor fear.
Nickey Friedman owns shares of Google (C shares). The Motley Fool recommends Chipotle Mexican Grill, Google (A shares), and Google (C shares). The Motley Fool owns shares of Chipotle Mexican Grill, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.