With shares of Mondelez (NASDAQ:MDLZ), formerly known as Kraft Foods, now trading around $27 per share, is MDLZ a BUY, a WAIT and SEE, or a STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework.
C = Catalyst for the Stock’s Movement
As of October 2, Mondelez and Kraft Foods Group (NASDAQ:KRFT) began trading as separate companies. Kraft Foods announced at the beginning of the month that it had spun off its North American grocery operations as Kraft Foods Group and changed its name to Mondelez. The company is now comprised of the snack brands acquired in the $19.5 billion Cadbury acquisition in 2010, and it will concentrate its resources on “powerbrands,” which include Cadbury chocolates, Oreos, and Trident gum.
However, some analysts on Wall Street believe that the division of Kraft will make the resulting pieces attractive takeover target.
H = High Quality Pipeline
Mondelez’s brand portfolio makes it a worldwide leader in chocolates, biscuits, and candy markets as well as a dominate player in the gum and coffee markets. According to current estimates the company is expected to grow at rate between 5 and 7 percent in the next few years, with 75 percent of its revenues projected to be made in the chocolate, biscuit, and gum markets.
“I feel very good about the portfolio we have today,” Rosenfeld said at the Nasdaq stock market on October 3. “Most of our growth will come organically.”
Mondelez operates in 80 markets across the world and the company is expected to earn approximately $36 billion a year. Of total revenues, 44 percent is expected to be derived from emerging markets, including Brazil, Russia, India, and China. However, Europe is also a large market for Mondelez, accounting for 37 percent of all revenues.
“We continue to stay focused on our power brands; we are allocating even more of our advertising, research and development resource to these brands,” said the company’s European president Tim Cofer. “They represent 60% of our revenue and all of our growth.” Furthermore, he added, powerbrands provide insulation from competition.
According to Cofer, the company is looking to expand its popular brands on the continent. Already a new product, “chocobakery” has seen sales rise by 29 percent this year by combining chocolate brands, like Milka with biscuits or bakery goods.
T = Trends Support the Industry in which the Company Operates
The division of the company was not unexpected. Krafts’ decision to highlight its best-known brands in a separate company has been a strategy in the European food industry for much of the last decade. Kraft is not the only company to break into smaller pieces over the last year; Sara Lee spun off D. Master Blenders and changed its name to Hillshire Brands (NYSE:HSH), and Dean Foods (NYSE:DF) filed in August to spin off its WhiteWave unit.
Mondelez’s focus on “powerbrands” is similar to the strategy implemented by Nestle (NSRGY), the world’s largest food company by sales. According to the Wall Street Journal, analysts estimate that the Switzerland-based company earns 75 percent of its 83.64 billion Swiss francs sales from its “billionaire brands.” Nestle’s Nescafe instant coffee, Kit Kat chocolate bars, and Maggi bouillon cubes generate annual sales of more than 1 billion Swiss francs, or $1.06 billion.
Mondelez expectations are high as the company has a forward P/E of 17.5x that is greater than that of Kellogg Company (NYSE:K) and General Mills (NYSE:GIS), and a five year expected growth rate of 13 percent. Moreover, the reliance on “powerbrands” comes with risk. If any of these brands takes on a significant challenge, the company will feel great pain.
Despite a strong outlook for Halloween candy sales, Mondelez looks like a WAIT and SEE based on the key metrics above.
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