Summary
Mondelez is the global market leader in biscuits and chocolates. It has the No. 1 or No. 2 position in many core market segments of biscuits, chocolates, candies, and gums.
The company is increasing margins by extracting out costs and inefficiencies.
Capital allocation is disciplined and focused on growth and shareholder returns.
Net debt is declining, and simultaneously interest coverage is rising while the leverage ratio is falling.
The stock is undervalued.
WILLSIE/iStock Editorial via Getty Images Mondelez ( MDLZ ) is a company most dividend growth investors should keep on their watch list. The snack giant was a part of Kraft Foods before the reorganization in 2012. Today, the company owns leading global cookie, cracker, and chocolate brands. However, despite the market leadership, the stock is little followed by SA authors and readers, which is a mistake. There are three reasons to add Mondelez to an investment portfolio: rising margins, market leadership and wide moat, and disciplined capital allocation. In addition, Mondelez is a dividend growth stock and slightly undervalued. I view Mondelez as a long-term buy. Rising Margins
Mondelez is a company becoming more profitable each year. As a result, gross, operating, and net profit margins have risen consistently since 2012. For instance, gross margins were slightly more than 37% in 2012, and today they are over 39%. Similarly, operating margins have risen from about 12% to more than 16%, while net profit margins have nearly tripled to 13%. Source: TIKR.com
The company has successfully removed costs and extracted out inefficiencies. Mondelez’s cost of goods and selling, general, and administrative expenses have trended lower. The company is focused on cost reductions and increasing margins by empowering local leaders. Mondelez has a global manufacturing and distribution footprint resulting in higher efficiencies. For example, Mondelez sells its products in over 150 countries, operates in 80 countries, and has 133 manufacturing facilities in 45 countries. The company’s scale also gives supply chain efficiencies that smaller competitors cannot match. Furthermore, the snacking giant’s brands have high volumes leading to lower per-unit costs. This scale permits Mondelez to grow a brand with incremental increases in costs.
In addition, Mondelez is trying to improve efficiencies. As a result, the company has lowered CO2 emissions by (-15%), food waste (-20%), and packaging by -65,000 tons. These decreases translate to higher margins.
There is room for Mondelez to further increase margins. For example, Hershey ( HSY ), another snacking company, has higher gross, operating, and net profit margins than Mondelez. The table below shows the differences in margins between the two companies in the LTM. Based on this comparison, Mondelez likely has more cost and scale efficiencies it can leverage.
Source: TIKR Market Leadership And Wide Moat
Mondelez is the global market leader in cookies and crackers. The company is also a significant player in chocolates and candies and owns market-leading regional and local brands. Mondelez has nine international brands including Oreo, belVita, Toblerone, Milka, and Cadbury. In addition, the company owns 65 smaller local and regional brands. Major local brands in the cookie and cracker markets are Wheat Thins, Ritz, Triscuit, LU, and Chips Ahoy. In the chocolate market, major local brands are Lacta, Alpen Gold, Marabou, Freia, and Cote d’Or. The company states that it is No. 1 or 2 in the core biscuit, chocolate, candy, and gum segments. Biscuits and chocolates are the essential categories generating approximately 80% of net revenue in 2020. Source: Mondelez 2021 Investor Brief
Oreo is a global brand with over $3.6 billion in sales in 2020, about 13.5% of total sales. This percentage is significant, but the brand is still growing at a double-digit rate. Oreo is the No. 1 cookie brand in the US. The company is expecting another $1 billion in revenue by 2023. Mondelez is the clear leader in cookies in the US since it owns Oreo and Chips Ahoy, No. 2 in the US. Source: Mondelez 2021 Investor Brief
Besides Oreo, the other two large global brands are Cadbury, with more than $4.0 billion in revenue, and Milka, with more than $2 billion in revenue. Combined, Oreo, Cadbury, and Milka generate about 36% of total revenue.
Source: Mondelez 2021 Investor Brief
If the company has one weakness in its brand portfolio, it is gum and candy. Sales are declining due to intense competition and the negative impact of the COVID-19 pandemic.
However, Mondelez has a wide moat. The company owns brands, manufacturing plants, and distribution facilities at a scale challenging to replicate. In addition, brand dominance requires significant […]
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