In this article, let's take a look at Mondelez International, Inc. (MDLZ, Financial), a $73.48 billion market cap company, which is a global snack food company.
Louis Moore Bacon (Trades, Portfolio) is an American hedge fund manager and trader who focuses on a global macro strategy to invest in the markets. This strategy focuses on indices, currencies, commodities and other asset classes based on expectations about specific markets and asset classes. They had their second consecutive month of net inflows in May. Although funds for $1.6 billion were added during the month, it was not enough to bring the flows to positive territory considering the entire year.
Bacon has been in the top 20 of money earners since the 1990s. He is considered one of the top 100 traders of the 20th century. With an estimated current net worth of around $1.75 billion, he is ranked by Forbes as one of the richest people in the world. He is the manager of a leading New York City-based hedge fund, Moore Capital Management.
The investment guru initiated a stake in the company with 155,000 shares during the fourth quarter of 2014 and added 400,000 shares in the first quarter of 2015.
More recently, Ken Fisher (Trades, Portfolio) has taken a long position in the stock, adding 8,909 shares in the second quarter of 2015. On the other hand, on July 31, Goldman Sachs (GS, Financial) downgraded the company to “Hold” from “Buy.”
Cost reductions
The company has a strong brand mix and a global reach. Emerging markets represents 40% of sales, other 40% from Western Europe and the rest from North America. Brazil, Russia and Canada are countries where the firm has great challenges in the future. Further, in China the company has weaker biscuit performance. Despite this, Mondelez is a leader in the global confectionery space, with 15% share of the chocolate market and 18% of the biscuit category.
Last year, it announced a cost-savings program, which is expected to save $3.5 billion by 2017. So we believe for the future that those cost reductions plus a more efficient use of media spending should help operating profit margin expansion.
Revenues, margins and profitability
Looking at profitability, revenue declined by 9.19% but earnings per share increased in the second quarter compared to the same quarter a year ago ($0.25 vs $0.36). During the past fiscal year, the company reported lower earnings of $1.27 versus $1.28 in the previous year. This year, the Street expects an improvement in earnings ($1.72 versus $1.27).
The gross profit margin is considered high at about 40%, and the net margin for the quarter that ended in June 2015 was 5.30%. Operating Margin is at 9.49% and is ranked higher than 72% of the 1421 companies in the Global Confectioners industry. The margin has been in five-year decline at an average rate of decline per year is -1.7%.
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 | 7.60 |
| GIS | General Mills | 21.17 |
| HSY | The Hershey Co | 56.58 |
| K | Kellogg Co | 14.17 |
| Ă‚ | Industry Median | 6.54 |
The company has a current ROE of 7.60% which is lower than the industry median but lower than the one of Kellogg Co (K, Financial).
In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, General Mills (GIS, Financial) could be the option. Hershey (HSY, Financial) has a extremely good ratio. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.
| Quarter Ended | Mar-13 | Jun-13 | Sep-13 | Dec13 | Mar-14 | Jun-14 | Sep-14 | Dec14 | Mar-15 | Jun-15 |
| ROE (%) | 6.68 | 7.60 | 12.70 | 21.83 | 2.04 | 7.79 | 11.40 | 6.83 | 4.96 | 6.60 |
Relative valuation
In terms of valuation, the stock sells at a trailing P/E of 36.08x, trading at a premium compared to an average of 22.2x for the industry. To use another metric, its price-to-book ratio of 3.04x indicates a premium versus the industry average of 1.55x, which is close to 10-year high of 3.03. Also, the P/S Ratio is close to 10-year high of 2.34. The ratios indicate that the stock is relatively overvalued and subject to a potential sell.
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 $37.289, which represents a 30.3% compound annual growth rate (CAGR).
Final comment
We believe rising incomes as well as improving distribution channels, should help fuel growth for Mondelez. Despite some disappointing quarters, the company expects to grow revenues. However, this growth may be offset by strength of the U.S. dollar relative to other currencies. For example, adjusted EPS would have been 25% greater before FX effects in the first quarter.
Other hedge fund gurus have been active in the company. Gurus like Steven Cohen (Trades, Portfolio), Louis Moore Bacon (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and Andreas Halvorsen (Trades, Portfolio) have added this stock to their portfolios in the first quarter of 2015, as well as Caxton Associates (Trades, Portfolio), First Eagle Investment (Trades, Portfolio) and Signature Select Canadian Fund (Trades, Portfolio).
Disclosure: Omar Venerio holds no position in any stocks mentioned
