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Morningstar | Mondelez Breaks From Struggling Peers, Posts Uptick in Sales and Margins; Shares Still Offer Upside

We don't anticipate any material change to our $51 fair value estimate for Mondelez following second-quarter results (3.5% organic revenue growth and 130 basis points of adjusted operating margin expansion to 16.7%) that are tracking in line with our full-year expectations (low-single-digit sales growth and nearly 17% adjusted operating margins). While we view the balanced top-line gains as a plus (1.4% higher prices and a 2.1% uptick in volumes and mix), the firm was lapping a weak year-ago period, during which sales tumbled nearly 3% reflecting the impact of the global cyberattack, making the performance less impressive.

However, we believe one of CEO Dirk Van de Put's primary strategic priorities will hinge on ensuring sales growth proves sustainable, which we expect the firm will shed more light on during its upcoming investor event in September. We don't posit the pendulum will swing entirely toward top-line improvement at any cost, though. Rather, we expect management will also divulge its hunger for further margin expansion, building on the gains realized over the last several years (with adjusted operating margins that have shot up 500 basis point to more than 16% between fiscal 2014 and fiscal 2017). From our vantage point, a portion of any efficiency gains realized would likely be used to fund additional brand spend (with our forecast calling for more than 8% of sales, or $2.5 billion, annually allocated toward research, development, and marketing) and ultimately support the brand intangible asset (its entrenched retail relationships) that underlies its wide moat.

Shares edged up at a mid-single-digit clip in after-hours trading, but continue to represent around a 15% discount to our valuation--which is based on 4% annual sales growth over the next decade and 20% operating margins, an increase of 400 basis points by fiscal 2027. As such, we'd suggest investors hungering for a slice of the packaged food space should feast on this name.

From a geographic perspective, sales growth was broad based, with emerging markets (up 5% on an organic basis) modestly outpacing developed regions (up 2.6%). However, North America (around one fourth of consolidated sales) was a bright spot on the surface--organic sales were up nearly 6% versus a decline of 4% last year due to the security breach. We aren't blind to the competitive and inflationary headwinds (both in terms of commodities and transportation) plaguing firms across the consumer products landscape, though, we posit Mondelez will weather these challenges with its portfolio of leading brands, entrenched retail relationships, and expansive global scale.

In terms of capital allocation, while we expect Mondelez will remain a consolidator in the space (most recently adding Tate's Bake Shop--a domestic premium cookie manufacturer, with a portfolio centered on using simple ingredients--to its mix), the firm also announced an 18% bump in its dividend, leaving its payout at around 40%. We forecast Mondelez will increase its shareholder dividend (which currently yields around 2%) in the high-single-digit range on average annually through fiscal 2027 (implying a payout ratio of 30%-40%), while also repurchasing around 2%-3% of shares outstanding annually.