EUR 850.00 For Business Accounts Only

Morningstar | Wide-Moat Mondelez Cooks Up a Recipe for Sales Acceleration in 1Q; Shares Fairly Valued

The major question in advance of Mondelez’s first-quarter results was the extent to which the firm would be able to string together another period of improving top-line gains in the face of intense competitive angst (on top of the 1.2% and 2.5% organic sales growth realized in the last two quarters to close out fiscal 2018). And we think the firm’s 3.7% organic sales growth should serve to quell concerns that Mondelez’s strategic course to elevate its top-line trajectory by extending the distribution of its fare and reinvesting in product innovation aligned with consumer trends while also maintaining a stringent focus on costs appears to have some legs.

We view this result even more favorably given the balanced contribution from higher prices (up 2.0%) and increased volumes (up 1.7%). Further, we don’t posit that the firm is chasing sales growth at any cost, as adjusted gross margins ticked up 30 basis points to 39.7% (which we view favorably in light of cost inflation that continues to plague operators throughout the industry) while adjusted operating margins held flat with the year-ago period at 16.7% (as the firm opted to boost spending behind its brands).

We believe these efforts should support its entrenched retail relationships and its leading brand mix, which when combined with its expansive global scale underpins our wide economic moat rating. Results through the first three months of fiscal 2019 are tracking in line with our full-year outlook, and we see little to warrant a change to our $52 fair value estimate (outside of a modest bump to reflect additional cash generated since our last update) or our long-term forecast (calling for 3%-4% annual sales growth and another 400 basis points of operating margin improvement over fiscal 2018 to 19% by fiscal 2028). However, shares now generally trade in line with our valuation, and we’d suggest investors await a more pronounced margin of safety before initiating a position in this name.

From a geographic perspective, Mondelez’s emerging markets (just less than 40% of sales, with organic sales up 8.4% in the quarter) again posted outsize gains (particularly relative to the firm’s developed markets, which were up just 0.8% in the quarter). We attributed this performance to added spend behind its smaller, niche local brands that had previously been starved from an investment perspective (as the firm favored funneling resources to support its larger, global brands). Longer term, we think these gains stand to persist (albeit not to the same degree) given management’s aims to empower those individuals who have a pulse on the local consumer tastes to make decisions regarding product innovation and distribution (the benefits of which will likely take longer to foster). In this vein, management is targeting mid-single-digit long-term sales growth in its emerging market regions versus low-single-digit growth in developed markets, both of which align with our forecast.

We don’t believe the firm’s pursuit of growth will rest entirely in elevating its existing business mix. Rather, we posit management could crave inorganic opportunities as a means by which to enhance its scale in growth markets, build out its position in snacking adjacencies, and bring new capabilities in house. In this vein, we continue to believe that its bent toward acquisitions will generally center on smaller, bolt-on deals that are unlikely to move the needle on its financial performance (similar to the recent tie-ups with Tate’s Bake Shop, Enjoy Life Foods, and Kinh Do). Despite this, we wouldn’t be surprised if Mondelez sweetened toward Campbell’s international business, which primarily consists of more desirable snacking brands (including the Kelsen and Arnott’s brands). Even at a low-single-digit multiple to sales, or around $2 billion to $3 billion, though, we doubt this deal would place a strain on the firm’s leverage levels; our estimates suggest it could assume an additional $6 billion to $7 billion in long-term debt, which would take debt/adjusted EBITDA from the mid-3s to the mid-4s. Moreover, we don’t posit Mondelez will veer from its historic bent of operating as a prudent capital allocator, as shown in its adjusted returns on invested capital have exceeded our cost of capital estimate in each of the past five years.