Mondelez International (NASDAQ: MDLZ) is a world leader in biscuits, chocolate, gum, candy, and powdered beverages, with top brands such as Oreo, Cadbury, Trident, and Tang.
Mondelez stock's total return over the past year (through March 1) is 13.8% -- tastier than the S&P 500's and chocolate giant Hershey's losses of more than 4% and 8%, respectively, and roughly as mouthwatering as packaged-food producer J.M. Smucker's (NYSE: SJM) 14.1% return.
In this article, I look at three reasons Mondelez's stock price could fall. This is not a declaration that any of these things will happen, nor that the stock price will decrease. I'm just examining the merits of a bear argument thesis, as investors should do with their stocks.
Image source: Mondelez.
1. Currency headwinds could continue – or even strengthen
In 2015, Mondelez's revenue growth was negatively affected by a whopping 12.6 percentage points from changes in foreign exchange rates. The strong U.S. dollar has been hurting the reported revenue growth of U.S. companies that do a significant amount of international business. The currency impact flows through to the critical bottom line as well. Mondelez has been particularly hurt, as the bulk of its business – 76% in 2015 -- is generated in international markets.
Fellow packaged-food producer Smucker, best known for its iconic jellies, hasn't faced nearly the same currency headwinds. That's because Smucker sells the vast majority of its product in the U.S.
If currency headwinds continue, Mondelez's revenue and earnings will continue to suffer. It's, of course, impossible to predict future currency exchange rates. However, there seems a good likelihood that the U.S. dollar could continue to strengthen given the volatility in many parts of the world. While some might think Mondelez should try to increase the amount of product it sells in the U.S. to lessen the negative impact from currency, my point No. 2 provides a reason that doesn't seem like a good strategy.
2. Consumers' shift toward healthier eating could accelerate
Mondelez sells packaged snacks -- products that generally have high levels of sugar, fat, salt, and artificial flavors and colors. Meanwhile, consumers in developed markets, particularly in Continental Europe, though also in the U.S., are increasingly moving toward healthier -- or at least less unhealthy -- food choices.
Healthier eating trends have apparently already hurt Mondelez's results. In 2015, the company grew organic net revenue (excluding currency impacts) by 3.7%. However, it experienced revenue contraction in the developed markets of Western Europe and North America combined, which together generated 59% of its total revenue. Most troubling, its revenue in Western Europe, its largest market, fell 1.9% on a constant-currency basis.
Image source: Mondelez.
Mondelez has naturally taken some actions in response to these consumer-eating trends. Last February, for instance, it acquired small, privately held Enjoy Life Foods, the market-leader in the fast-growing "free from" segment. Enjoy Life offers snack foods that are gluten-free, and free from the eight most common allergens. By 2020, Mondelez plans to reduce saturated fat and sodium by 10%, increase the use of whole grains by 25%, and discontinue using artificial flavors and colors across its product portfolio. Whether these actions will be enough remains to be seen. Notably, the company doesn't have a target reduction for sugar -- and cutting down on sugar intake is arguably one of the major healthier-eating trends.
3. It could continue to lose market share in chocolates
Mondelez's business performance is highly dependent upon its chocolate business, which accounts for about 30% of its total revenue. The company holds the largest share of the global chocolate market, with its Cadbury and Milka brands particularly popular around the world, especially in Europe, its largest chocolate market.
Milka is the best-selling chocolate brand in Europe. Image source: Mondelez.
Mondelez has been losing market share in the global chocolate category for at least two years. In 2015, the company's organic net chocolate revenue (chocolate revenue which excludes currency effects and contributions from any acquisitions made within the last year) increased just 0.9% from 2014, which is considerably lower than the 5.4% growth in the overall chocolate market. In 2014, this metric grew just 1.6% while the chocolate market expanded 3.7%.
Mondelez has said that this loss of market share is due to the fact that it increased chocolate retail prices in 2014 before its competitors. It raised prices because of rising input costs, primarily cocoa. (The company hedges against rises in commodity costs, but no hedging program is going to fully insulate a company from price increases.) Mondelez lost some market share as some buyers switched to lower-priced brands. Additionally, some retailers in Europe didn't accept these price increases, which contributed to the loss of market share since consumers can't buy a product if it no longer is available at the retail outlet they frequent. The company's performance in chocolates improved in the second half of 2015, according to information shared on the most recent quarterly conference call. However, it's too soon to tell if the downtrend has ended.
If Mondelez's market share in chocolates continues to fall to the point that the segment is shrinking in size on a constancy-currency basis, the company's overall performance would suffer unless it replaced the lost revenue in its other segments. This scenario could cause the stock price to fall.
Wrap-up
Mondelez's biggest dilemma is illustrated in Nos. 1 and 2. Currency headwinds are significantly negatively impacting its results in its international markets, which include its fastest-growing markets. Meanwhile, a greater number of consumers in its large developed markets of Western Europe and the U.S. are increasingly moving toward healthier food choices.
