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Mondelez’s Cost-Saving Plans Boost Margins, Sales Weak


Mondelez International, Inc. MDLZ has been focusing on strengthening margins through cost savings and productivity improvement. The company’s margins improved 600 basis points (bps) since 2013.

The company’s operating margin grew 130 basis points (bps) to 16.3% in 2017, driven by strong net productivity and lower SG&A. On a regional basis, strong net productivity and cost execution drove margins in three of four regions. Europe delivered a strong margin growth of 160 bps to 19.7%, AMEA increased 140 bps to 13.1% and Latin America rose 260 bps to 15.5%. However, North America fell 10 bps to 20.1%, thanks to limited margin growth stemming from select trade investments and lower revenues.

Mondelez has undertaken some major steps to improve margins, cash flow and return on invested capital. In February 2014, the company announced a $3.5-billion restructuring plan (2014-2018 Restructuring Program). The program continues to accelerate supply chain cost savings and reduce overhead costs through layoffs, asset disposals and implementation of a zero-based budgeting system (ZBB) to offset commodity and currency-driven inflation.

The savings from the program will not only expand margins but also fund growth initiatives like streamlining infrastructure and internal processes. Mondelez expects to complete the re-structuring program by 2018-end.

The program is expected to generate annualized savings of at least $1.5 billion by 2018 and annual net productivity to improve of around 3% of cost of goods sold which can be re-invested in margin expansion. In 2018, operating margins are expected to be approximately 17%.

Sales Weak

It goes without saying that major food companies are having a tough time due to the shift in consumer’s preference toward natural and organic food. The industry woes have also been hurting Mondelez’s price performance for quite some time. The stock has gained only 0.4% in the past year compared with 10% decline of its industry. Nonetheless, we are encouraged by the company’s focus on innovation and brand building, cost savings as well as productivity gains.

Also, upward estimate revisions further optimism regarding the stock’s prospects. Earnings estimate for 2018 moved up 3.8% over the past 60 days. This indicates analysts’ optimism about this stock’s near-term performance. Earnings are expected to increase 15.4% and 9.3% in 2018 and 2019, respectively.

Zacks Rank & Stocks to Consider

Mondelez carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the same industry include Post Holdings, Inc. POST, US Foods Holding Corp. USFD and United Natural Foods, Inc. UNFI. All the three companies sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Post Holdings is likely to see a 69.3% increase in fiscal 2018 earnings.

US Foods is expected to witness 48.6% rise in 2018 earnings.

United Natural Foods’ fiscal 2018 earnings are expected to grow 14.4%.

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