If anything, Bill Ackman (Trades, Portfolio) agrees that buying Mondelez (MDLZ, Financial) stock between $40.81 and $46.81 over the last quarter was a bargain. The guru investor had this to say in September:
“We believe that now is an attractive time to invest in Mondelez because its profit margins are just beginning to expand after several years of limited improvement. In addition, we believe that 3G Capital, through its ownership of Heinz, and now Kraft, has established new benchmarks for operational efficiency, organizational design and management alignment, which have allowed 3G companies to be more profitable, nimbler and better positioned to grow over the long term. We believe that 3G’s higher standards for operating performance will catalyze a competitive response in the packaged food industry, leading to greater operating margins and profitability for Mondelez and other companies in the industry.”
Of course, Mondelez International isn’t exactly new to Ackman's radar screen. In 2010, the guru investor bought more than 32 million shares of the company in 2010, selling out in Q2 2012 and then buying back 5.9 million shares in Q4 2012 only to sell out again in Q2 2013. It’s been more than two years, and maybe he’s getting hungry for snack food again or just going back to a safe investment considering his Valeant (VRX, Financial) trade is down more than 50% from the $178.38 reported price.
Mondelez, at this level, offers upside potential based on price multiple expansion and continued product price increases based on its market dominance –Â each of these leading to much higher market values.
Mondelez is comprised of major iconic brands from Kraft, Cadbury, Nabisco, and LU – each of these brands that have delighted customers for more than 100 years. Because of that, the company enjoys one of the strongest competitive advantages in the consumer goods market with products like Oreo, Honey Maid and Ritz. Here’s a full list: http://www.mondelezinternational.com/brand-family.
Financially, the company has been able to squeeze out more with less – since 2005, Mondelez has seen its revenue drop from $34 billion down to $31 billion but has done a good job keeping its operating margins stable despite an international food fight.
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But, if Ackman is right and the current operating margins (32%) can be expect to remain stable for years to come, Mondelez is a massive bargain at this price. Over the last 12 months, the company has earned over $8.4 billion, but the price multiple has caught up yet. The why could be that Mondelez institutional investors like Vanguard, Blackrock, Invest and Morgan Stanley don’t know if the earnings are going to be stable or not and re-evaluating the stock higher based on a one off rise in earnings would not be prudent.
I think it’s safe to say that the eight multi-billion dollar brands Mondelez boasts will continue to pound out cash. And, while the company is not totally immune to an economic slowdown, with 80% of its sales coming from outside the U.S. and cost cutting helping boost margins, the fair value is actually closer to $75, and future value could be much higher if the company can predictably earn over $5 per share going forward.
A few statements can be virtually assured.
- The price of snack foods will continue to rise.
- The average P/E in the industry will be around 20
If Mondelez demonstrates it can earn $5-plus per share annually, then it’s a $100 stock. As long as the brands it owns can continue to price products higher and higher, over time it will earn $5 per share. The question is whether that’s three years, five years, 10 years or longer. I think it happens sooner rather than later.
