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Morningstar | Mondelez Boasts Sweetened Sales and Profits in 3Q; Investors Should Snack on Shares

Mondelez’s third-quarter results (1.2% organic sales growth and 40 basis points of adjusted operating margin expansion to 17.1%) did little to sway our take that its recently divulged strategic agenda should facilitate further margin gains and lead to improving sales (by extending the distribution of its fare and reinvesting in product innovation aligned with consumer trends around the world). In this context, management has alluded that it intends to realize additional efficiency gains between fiscal 2019 and fiscal 2022, without going so far as to quantify its aim. However, we posit an additional $1 billion in excess costs could be removed (on top of the $1.5 billion realized over the past several years), centered on removing complexity from its operations (including rationalizing its suppliers, parting ways with unprofitable brands, and continuing to upgrade its manufacturing facilities), a portion of which we surmise will be reinvested behind its brands, supporting the intangible asset source of its wide moat. As such, we haven’t wavered on our forecast, which calls for research, development, and marketing to amount to about 8% of sales over the next 10 years (or about $2.6 billion annually).

However, intense competition and inflationary pressures (related to commodities and transportation) remain challenges for firms throughout the industry, and Mondelez isn’t immune. From our vantage point, though, its entrenched retail relationships, the resources it invests behind its leading brand mix, and expansive global scale should ensure Mondelez withstands these headwinds longer term. In this vein, we don’t intend to alter our long-term forecast (3%-4% average annual top line growth through fiscal 2027 and another 300 basis points of operating margin expansion to around 20% by the end of the decade) and are holding the line on our $52 fair value estimate. Trading at a 25% discount to our valuation, we’d suggest investors consider building a position in this name.

From a geographic perspective, Mondelez’s emerging markets (40% of sales) remain a bright spot, chalking up organic sales growth of 5.4% (4.5% excluding the inflationary Argentina market). But as a means to ensure this growth proves sustainable (and comes alongside further share gains) while also reigniting its trajectory in developed market regions (which ticked up a mere 0.3% in the quarter), Mondelez is opting to employ a multifaceted approach, the pillars of which we view as prudent. More specifically, and as we articulated in our August Select piece “While Shares Have Soured, Mondelez Still Offers a Sweet Treat,” management is now aiming to empower its local leaders to a greater extent. We view this as important, given tastes and preferences vary around the world, which have impeded sustained share and volume gains. In our view, this shift stands to more effectively equip Mondelez to funnel insights (and additional spending) to innovate its local product, helping boost sales in these markets. In this vein, management is targeting mid-single-digit long-term sales gains in its emerging market regions versus low-single-digit growth in developed markets, both of which align with our forecast.

Further, the firm continues to emphasis a desire to move away from large-scale product launches to more of a “test and learn” approach, centered on bringing a product to market in a select local market, assessing the consumer response, and altering the offering as necessary to more effectively win with consumers around the world. This strikes us as a prudent means to more nimbly respond to evolving consumer trends. From our vantage point, an inability to bring products to market in a timely fashion (with product innovation across the industry historically taking anywhere from 18 to 24 months to move from concept to shelf) has hindered top line gains for Mondelez and its peers. As such, we look favorably on efforts to combat these challenges.