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Mondelez (MDLZ) Cost-Saving Plans Impress, Fx Woes Stay

Zacks

On May 15, we issued an updated research report on Mondelez International, Inc. MDLZ – a leading global snacks company.

Mondelez recently reported first-quarter 2017 results, with both earnings and revenues surpassing the Zacks Consensus Estimate. Cost-saving initiatives as well as good pricing mainly in Latin America helped the company post better-than-expected results. However, Mondelez’s volumes continue to decline and currency translations remain a major headwind affecting revenues by 1.5% in the quarter.

Notably, Mondelez’s shares gained 3.3% year to date, outperforming the 0.9% decline of the Zacks categorized Food-Miscellaneous Preparation/Diversified industry. Estimates for the current quarter went down 4% while that for 2017 moved 0.5% north over the last 60 days. This mixed trend is why the stock has a Zacks Rank #3 (Hold), indicating that while the stock’s growth story might be bright over the long term, analysts have apprehensions over the stock’s immediate performance.



Upside

Mondelez’s portfolio comprises seven brands which generate revenues of over $1 billion and have been christened as “Power Brands”. This represents around 70% of the company’s revenues and has been growing at higher rates than the company average. Power Brands grew 2.5% organically in the first quarter of 2017. The company will continue to invest in Power Brands in the upcoming quarters, which is expected to boost sales further.

The company has a strong presence in emerging markets including Brazil, China, India, Mexico, Russia and Southeast Asia. Emerging markets’ net revenue rose 4.2% in the first quarter, including favorable currency impact. Organically, emerging market sales grew 3.5% with growth in India and Southeast Asia offsetting declines in China, Middle East and Brazil.

Mondelez has undertaken a few major steps to improve margins, cash flow and return on invested capital. In Feb 2014, the company announced a $3.5 billion restructuring plan (2014-2018 Restructuring Program) aimed at accelerating supply chain cost savings, reducing overhead costs through layoffs, asset disposals and implementation of a zero-based budgeting system (ZBB) to offset commodity and currency driven inflation. Also, in order to streamline its operations, Mondelez has been regularly divesting non-core underperforming businesses.

Downside

Mondelez’s key category — snacks — has been hurt by soft global retail and consumer demand. Mondelez, like many other U.S. food producers, has been struggling due to shifting consumer’s preference toward natural and organic ingredients over packaged and processed food. Snack category growth declined about 2.5% in the first quarter of 2017.

Mondelez’s volume trends have been weak since 2014 due to volume erosion by higher pricing and category weakness owing to lower demand. Volumes were down 0.5% in the first quarter of 2017.

Foreign exchange is a major headwind for Mondelez, with around 75% of its revenues coming from outside the U.S. In the first quarter of 2017, unfavorable currency impacted revenues by 1.5%. Currency headwinds are now expected to hurt adjusted earnings by about 2 cents and revenues by around 1% in 2017.

Stocks to Consider

Better-ranked stocks in the sector include Coca Cola Femsa S.A.B. de C.V. KOF, Embotelladora Andina S.A. AKO.B and ConAgra Foods Inc. CAG, all carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Full-year 2017 earnings are expected to increase 22.6% for Coca Cola Femsa and 36.5% for Embotelladora .

ConAgra surpassed earnings in all of the past four quarters, with an average beat of 10.7%.

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