Mondelez International Inc. is a consumer business that manufactures and sells snacks and beverages worldwide. It is known as the market leader in biscuits, chocolates, and gums and candies, and owns multiple million-dollar brands such as Cadbury and Milka chocolates, Belvita, Oreo, Trident, Toblerone, and Halls. It sells its products through supermarkets, wholesalers, convenience stores, and other distributors. Mondeleze operates in 80 countries and sells its products in over 150 countries. With a market cap of 84.34 B, they have consistently demonstrated strong financial performance, with revenue and net income of $26.6B and $3.6B USD in 2020.
Mondelez operates in the snack foods industry, which is projected to grow at a CAGR of 4.7% to $688.6 B by 2027. This is driven by a rise in disposable incomes, improving consumer lifestyle, and growing urbanization that increase demand for convenience foods. Key trends include an increased demand for salty and health-conscious snacks, which positions Mondelez well as it generates 43% of revenue from biscuits and has acquired multiple health brands. The largest segment is Europe, while the fastest growing market is China, which provides an advantage for Mondelez, which generates 40% of revenue from Europe and 20% from the Asia Pacific region.
The mature snack industry is highly fragmented and is dominated by large corporations as well as small local brands. Pepsico is the industry leader, holding 7.1% of market share, while Mondelez (6.9%), Nestle (3.6%), and Kellogg (1.8%) follow. Barriers to entry are low, with many private labels entering with innovative products that could pose a threat to Mondelez’ market share. Customers care deeply about flavours and branding, as 68% of customers rely on existing brands rather than new ones, giving Mondelez a competitive advantage.
Thesis 1: Powerful and Innovative Brands Driving Revenue Growth. Mondelez has a strong economic moat through its brand power, as it owns over 9 brands over $1 billion and numerous “local jewels” that drive organic revenue growth. Its biscuit brands Oreo and Belvita are ranked as the #1 biscuit globally, and their chocolate brands of Cadbury, Milka, and Toblerone are ranked #1 in Europe and AMEA countries. Meanwhile, they hold numerous local jewels such as Lacta, Alpen Gold, and Marabou which rank as the #1 brands in Brazil, Russia, and Sweden respectively. These brands, which make up 75% of its revenue, garner significant brand loyalty, generating operating margins that are ~2% higher than competitors and 2.6% organic revenue growth in 2020.
Moreover, Mondelez frequently engages in brand innovation, adapting brands to local trends and creating healthy alternatives to adapt to changing consumer preferences through its innovation hub, SnackFutures. Examples include launching Oreo Forbidden City in China in 2018 and amplifying Cadbury Bournvita nutrition credentials in India in 2020, leading to double-digit sales growth in both areas. Mondolez intends to continue its marketing and innovation spend from 2020-2025, positioning it well for the future.
Thesis 2: Aggressive Acquisition Strategy Creating Strong Runway for Growth. Mondelez’s aggressive acquisition strategy of brands in developed and emerging markets creates a strong runway for growth. This strategy is effective for two reasons: it allows them to bolster their product portfolio in high-potential segments and expand geographically, which will drive future revenue. From 2018 to 2020, they have acquired over 6 brands across a variety of food segments with a focus on premium and health foods. Most recently, they acquired Give and Go, a leader in bakery goods, and capitalized on the consumer trend of healthy eating through buying Hu Snack Foods, a leading health food company. These stakes are expected to generate an additional $550M in revenue. Moreover, this acquisition strategy allows them to expand their geographical footprint across nations, with its stake in JDE Peet, the world’s largest tea group, increasing their European and global revenues.
Thesis 3: Strong Management Team with History of Shareholder Value Generation. Mondelez has a strong management team who place emphasis on generating shareholder value. Their compensation system links pay to long-term profitability and incorporates executive stock ownership, incentivizing management to focus on creating shareholder value. Over the past 3 years, their cumulative Total Shareholder Return has been 45.9%, compared to a peer median group’s of 18.7%. ROIC and ROE have increased 3% and 6% respectively since 2017, and they have had dividend payouts increasing by 24% per year from $0.82 in 2018 to $1.20 in 2020. They have also consistently generated strong cash flow of ~$2700 since 2017. Management has reaffirmed its 2021 goals to generate organic revenue of +3%, Free Cash Flow of +3B, and to have dividend growth outpace EPS growth, meaning that investors can expect to see significant upside in the future.
Catalysts & Risks
(C1) Acquisitions in Health Companies: Mondelez’s recent acquisition of Grenade, a Britain protein bar company, will drive European revenue and allow it to capitalize on demand for healthy snacking options.
(C2) Focus on Sustainability: Mondelez’s sustainability initiatives, such as its recent announcement to launch Sustainable Futures, an impact investing platform to support sustainable ventures, will boost brand sentiment.
(C3) Potential to Surpass First Quarter Earnings: Mondelez has performed strongly in Q1 2021 due to strong demand from their international markets. With the recovery of the global economy driving consumer spending, there is a high chance of beating earnings expectations in Q2, which will drive up stock price.
(R1) Foreign Exchange: As 75% of Mondelez’s revenues come from outside the US, fluctuations in foreign exchange rates will negatively impact earnings. In 2020, FX lowered revenue by 3%.
(R2) Regulatory Risks: Being a global company, Mondelez is subject to regulatory risks such as the imposition of new tariffs, sanctions, trade barriers, or restrictions on key commodities such as cocoa.
(R3) Impact of COVID-19 on Emerging Markets: The COVID-19 outbreak could result in lower profits in emerging markets due to disruption of manufacturing and retail operations if social distancing rules are enacted.
Through conducting a discounted cash flow analysis, I recommend longing MDLZ. At its current share price (April 29, closing) of $60.91, I believe it is undervalued by 12.5% compared to its fair value of $68.50.