Mondelez reported fourth quarter and full year 2012 results reflecting solid organic revenue growth, and higher gross and operating margins. Organic revenues increased 4.4% year over year, while power brands, including Oreo and Cadbury, grew nearly double the company rate at 8.1%. Mondelez is still reaping the benefits of its 2010 Cadbury acquisition, where Cadbury has given Mondelez access to distribution networks in India, Brazil and Mexico, and is estimated to have saved the company $800 million in 2012 with similar savings expectations for future years.
Mondelez has robust opportunities internationally and has experienced better-than-peer performance in Europe. Sales and operating profit in Europe were up year over year for the first half of 2011 and 2012, and is on pace to be up again in 2013. Over 80% of sales are from outside of North America and the company is also looking to get even more exposure to emerging markets. Mondelez believes that developing markets (Latin America, Asia and Central & Eastern Europe) will represent about 45% of 2013 revenue, and Western Europe will account for 35%.
Based on Mondelez's below average 1.3 times price to sales ratio, the stock could well be considered undervalued. Putting the peer average 1.6 times P/S ratio on analysts' 2013 sales estimates and Mondelez's intrinsic value suggests the stock should trade above $33, upside of over 15%.
Avoid the competition
General Mills Inc. (GIS) made a big bet with its 2011 Yoplait Yogurt acquisition, but the segment has remained under pressure with dairy cost inflation leading to lower sales volume. However, the company still trades at multi-year highs. The key hindrance to General Mills is its lack of international presence, with only 12% of 2012 sales coming form international markets. What's more is that its U.S. retail segment has been performing weakly. The segment showed sales growth of only 2% year over year last quarter. However, with a beta of only 0.2, General Mills is also a low volatile stock.
Kellogg Company (K) has a lot of exposure to its legacy cereal business, which has been sluggish of late. Its U.S. cereal business has grown in the low single digits over the past few quarters; meanwhile, Kellogg's European segment is also seeing weakness, with both sales and operating profits declining last quarter as the country continues to face a sluggish economy. As well, where Mondelez is excelling internationally, Kellogg's international operating profit was down 22% and organic operating profit for Asia-Pacific was down 70% last quarter.
Campbell Soup Company (CPB) is been looking to hedge its high-sodium products with the Bolthouse Farms acquisition in 2012, which is a manufacturer of healthy food products. The acquisition gives Campbell access to a $12 billion packaged "fresh" foods market. During the second half of Campbell's fiscal 2013, Bolthouse contributed 8% to total sales and 2% to operating income. However, Campbell's international simple meals segment was up only 1% year over year last quarter.
ConAgra Foods Inc. (CAG) is trading well above its its historical price to earnings range, trading at 21 times, versus its historical range of 8 times to 16 times. This is on the back of a recent run up in the stock thanks to revised guidance. ConAgra upped its fiscal 2013 earnings guidance to $2.15 per share, above the previously guided $2.06. Its recent Ralcorp acquisition is expected to contribute $0.05 to that 2012 EPS number, and then contribute $0.25 to 2014. ConAgra appears to be on track for solid performance over the interim, but the big drawback for ConAgra is that the company solely operates in North America.
Although it has been said that Kraft Foods Group — the North American grocery business — will be the stable dividend payer, and Mondelez will be the fast growing snacks business with access to emerging markets, I believe that Mondelez presents investors with both an income and a growth opportunity.
Mondelez currently pays an annualized $0.52 dividend, which is only a 28% payout of earnings. The peer average payout ratio is closer to 60%. Thus, although Mondelez has the status of being a "growth" company, it has room to up its dividend. To give you an idea of just how flexible Mondelez is, if the food company did pay out 60% of earnings, the stock would have a 3.9% dividend yield, whereas the peer average yield is only 2.9%.
The strength in Mondelez's dividend lies in its industry leading balance sheet. The company has a superior debt ratio and long-term debt to equity position:
- Mondelez 26%
- General Mills 36%
- Kellogg 52%
- Campbell 52%
- ConAgra 29%
Long-term debt to equity
- Mondelez 66%
- General Mills 87%
- Kellogg 247%
- Campbell 223%
- ConAgra 65%
What's more is that Mondelez is expected to be one of the top growth stories over the interim. The five-year expected EPS growth rate according to Wall Street analysts stacks up as follows:
Five-year expected EPS growth rate
- Mondelez 13%
- General Mills 8%
- Kellogg 7%
- Campbell 6%
- ConAgra 11%
Mondelez offers investors growth opportunities and income; this includes the best five-year expected earnings growth rate, and a dividend with room to grow. A number of billionaire hedge funds are also large stakeholders in Mondelez, including Steve Cohen of SAC Capital, Jim Simons of RenTech and Warren Buffett.
Be sure to check out our detailed stock analysis (click here).