Mondelez International, Inc. (NASDAQ:MDLZ)
Mondelez reported first quarter 2018 results on May 1st. Organic sales growth for the quarter was 2.4%, with over 70% of this increase driven by volume and product mix, and the balance from pricing. This was the third consecutive quarter with both organic sales growth in the 2% to 3% range, and a positive contribution from volume and product mix. All regions outside of North America posted solid growth, including 5.5% growth in emerging markets, which represent nearly 40% of the company’s sales. North America, which accounts for less than 25% of the company’s sales, declined 1.8% in the quarter driven by ongoing weakness in gum, as well as transitory issues including inventory destocking at retailers, and poor supply chain execution. Encouragingly, consumer demand for Mondelez’s core cookie and cracker brands, which generate over 80% of the company’s sales in North America, appears robust, with retail sales for these brands growing 2.5% in the quarter.
Operating profit margins expanded by 30 basis points to 16.7%, as a continued reduction in overhead costs more than offset a decline in gross margin driven by unfavorable product mix, higher commodity costs, and freight inflation in North America. In contrast to most US-centric consumer packaged goods (“CPG”) companies that expect lower gross margins in the near-to-medium term, Mondelez management still expects gross margins to expand in the full year, reflecting both the company’s limited US presence, as well as the significant opportunity that exists to expand margins beyond current levels. EPS grew 19% as reported, or 10% on a constant-currency basis, driven by good operating performance as well as lower interest expense and share repurchases. We believe that Mondelez, with its advantaged category and geographic footprint, is one of the few CPG companies that should continue to deliver sustained double-digit EPS growth even in the current environment.
Despite posting results that were in-line with or better than those of its key global and snack-focused peers in the quarter, Mondelez continues to trade at an unwarranted discount to both its peers and intrinsic value. MDLZ is currently trading at approximately 15.5 times forward earnings, which is a trough valuation for the company since the spin-off of Kraft Foods in October 2012, and a 25% discount to its average valuation multiple since then. While some recent share price weakness has been driven by investor rotation out of consumer staples due in part to the rising interest rate environment, we believe that investors are wrongly penalizing MDLZ for the significant challenges facing more US-focused, center-of-plate packaged food companies that continue to experience organic sales declines. We believe that Mondelez’s valuation gap should close as the company continues to report differentiated results over the coming quarters, and as investors gain more comfort with the new CEO who will reveal the results of the company’s strategic review at the end of the summer.
From Bill Ackman (Trades, Portfolio)'s first-quarter 2018 shareholder letter.
