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Morningstar | Despite a Sweetened Share Price, Investors Would Be Wise to Keep Mondelez on Their Shopping List

Shares of wide-moat Mondelez have soared more than 30% from trough levels of around $37 per share over the past year. As such, we don’t believe the stock offers investors an attractive margin of safety to our $52 fair value estimate, which is based on our outlook for 3%-4% average annual sales growth over the next decade and another 400 basis points of operating margin improvement (over 2018 results) to north of 19% by fiscal 2028.

From our vantage point, continued visibility into the strategic path CEO Dirk Van de Put intends to pursue--centering on efforts to elevate its top-line trajectory by extending the distribution of its fare, reinvesting in product innovation aligned with consumer trends, and selectively tapping into inorganic growth opportunities while also maintaining a stringent focus on costs--has been viewed favorably by the market. And the initial fruits of these efforts are starting to emerge, as Mondelez has chalked up improving performance of late, with organic sales up 2.5% in the fourth quarter of 2018 on top of similar levels in the year-ago period.

Despite the recent appreciation (which has left shares trading at just below a 5% discount to our valuation), we aren’t blind to the competitive angst that persists, stemming primarily from other branded operators as well as smaller niche start-ups. And as such, we don't believe the trajectory of its top line is likely to head due north. Rather, we posit shares could retreat if sales stagnant in the near term amid an intensely competitive landscape, creating a more attractive entry point for shareholders. In this vein, we think investors should keep this wide-moat name on their radar. However, in the meantime for those interested in the packaged food space, we view wide-moat Kellogg as more compelling, as shares trade at around a 25% discount to our valuation and boast a 4% annual dividend yield.

Even as management works to propel its organic sales growth prospects, we surmise that it could also look to build out its portfolio of brands in other snacking adjacencies and/or expand its geographic footprint into untapped markets. And although we think that it could become a more active acquirer (with our estimates suggesting it could assume an additional $6 billion to $7 billion in long-term debt based on current leverage levels and management rhetoric, which would take debt/adjusted EBITDA from the mid-3s to the mid-4s), we don’t posit Mondelez will stray from its historic bent of operating as a prudent capital allocator--as shown in its adjusted returns on invested capital that have exceeded our cost of capital estimate in each of the past five years.