Mondelez: An Example of a Great Brand Portfolio

Author's Avatar
Sep 17, 2014
Article's Main Image

In this article, let's take a look at Mondelez International, Inc. (MDLZ, Financial), a $59.66 billion market cap company which produces snack foods.

Impressive Portfolio

The company has brands with exceptional value such as Oreo, Cadbury, Nabisco, Trident, and Tang. Nine products have annual sales of more than $1 billion, showing the revenue strength of its portfolio. In a macro view, Mondelez is a leader in the market, with 15% share of the chocolate market, 30% of the gum category, and 7% of the candy aisle. Further, in the biscuit business it has a good portion of the market with almost 20%, and in the powdered beverage arena with 16%.

Emerging Markets

In order to diversify the revenue stream, Mondelez focuses on emerging markets. About 40% of sales came from these regions, offsetting possible downturns in developed markets like Western Europe and North America. We must mention that no single country accounts for more than 10%, so there is no risk of big concentration areas. Moreover, other promising countries like Indonesia or Germany sound well to expand the operations. This should help other zone disappointments like the one of China, which represents 3-4% of total sales.

Investment Management Fund

Nelson Peltz, the American businessman and founding partner of Trian Fund Management L.P., could be influencing a buy recommendation, because we think news of owning shares of both PepsiCo (PEP, Financial) and Mondelez made some speculation that there could be a combination of the businesses.

Joint Venture

Some months ago, the company announced a joint venture with D.E. Master Blenders 1753 (DEMBF, Financial) in return for $5 billion and a good participation of 49%. Jacobs Douwe Egberts will be the name of the new firm, which is expected to have more than $7 billion in revenues and attractive margins.

Revenues, Margins and Profitability

Looking at profitability, revenue declined by 1.85%, but earnings per share increased in the most recent quarter compared to the same quarter a year ago ($0.36 versus $0.33). During the past fiscal year, the company increased its bottom line. It earned $1.28 versus $0.87 in the prior year.This year, Wall Street expects an improvement in earnings ($1.69 versus $1.28).

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker Company ROE (%)
MDLZ Mondelez 10.90
KRFT Kraft Foods Group Inc 44.41
GIS General Mills 27.92
HSY The Hershey Co 54.34
K Kellogg Co 49.17
 Industry Median 8.11

The company has a current ROE of 10.90% which is higher than the industry median. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking at those levels or more, General Mills (GIS, Financial) could be the option. Other companies, such as Kraft (KRFT, Financial) and Hershey (HSY, Financial) have extremely good ratios. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.

03May20171358121493837892.png

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 17.8x, trading at a discount compared to an average of 22.7x for the industry. To use another metric, its price-to-book ratio of 1.9x indicates a discount versus the industry average of 2.04x while the price-to-sales ratio of 1.8x is above the industry average of 1.08x.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $34,213, which represents a 27.9% compound annual growth rate (CAGR).

03May20171358131493837893.png

Final Comment

As outlined in the article, Mondelez should offset not so great results in a huge country with the growth prospects of faster-growing emerging markets.

The PE relative valuation and the return on equity that significantly exceeds the industry average make me feel bullish on this stock.

Hedge fund gurus like Louis Moore Bacon (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Jim Simons (Trades, Portfolio), Andreas Halvorsen (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014, as well as Pioneer Investments (Trades, Portfolio) and RS Investment Management (Trades, Portfolio).

Disclosure: Omar Venerio holds no position in any stocks mentioned