Mondelez Offers a Sweet Treat
The stock has languished, but we still like this wide-moat company.
Irene Rosenfeld orchestrated significant change during her nearly decade-long reign at wide-moat Mondelez (MDLZ). However, after the announcement last August that she would step down, the shares have held flat versus a 17% rise in the S&P 500 index. We attribute some of this to competitive angst and sluggish top-line gains and some to new CEO Dirk Van de Put’s slowness to articulate his strategic roadmap. But we think investors fail to appreciate the experience he brings to the table. While we aren’t surprised that Van de Put’s top priority is reigniting sales, we never expected the company would opt to sacrifice the hard-fought operating margin gains of the past four years. Rather, we believe the company is poised to extract further inefficiencies while driving an acceleration in sales. We 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, versus consensus of low-single-digit sales growth and high teens margins. Our outlook aligns with management’s long-term targets of 3%-plus annual sales growth and high-single-digit adjusted earnings growth. Mondelez currently trades more than 15% below our fair value estimate.
We believe that while the initial phase of Rosenfeld’s tenure was characterized by empire building following the acquisitions of LU Biscuits and Cadbury, the latter phase was geared toward honing the company’s focus--facilitating the spin-offs of the North American grocery business (now Kraft Heinz (KHC)) and the international coffee operations. We think slimming down created an opportunity to bolster underlying financial performance, particularly as Mondelez’s sales and profitability lagged peers. In 2014, the company laid out a path to extract more than $1.5 billion in costs from its operations over a multiyear horizon; this is set to wrap up at the end of calendar 2018. While a portion of these savings could have been defined as ensuing from low-hanging fruit, including reducing unnecessary spending on travel, information systems, and consultants, the more meaningful undertaking for Mondelez centered on upgrading its aged production line. Management has suggested that compared with the lines being retired, this upgraded technology has offered 1,000 basis points of margin improvement by taking up a fraction of the floor space, running twice as fast, and necessitating just one third of the human capital investment and half as much operating costs.
Erin Lash does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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