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Moderating Growth Could Hurt Mondelēz Stock


Jul. 8 2019, Published 11:41 a.m. ET

What’s driving Mondelēz stock higher?

So far, Mondelēz (MDLZ) stock has gained significantly this year. Mondelēz has generated better returns than most of its peers except for General Mills (GIS). The company’s balanced growth in volumes and pricing, margin expansion amid challenges, and strong EPS growth drove its shares. Mondelēz’s focus on expanding its well-being snacks portfolio through innovation and acquisitions also supported its stock.

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Mondelēz’s base business is impressive with healthy growth in its organic volumes and pricing. The company’s ability to contain costs and drive productivity savings supported the margin growth. Mondelēz’s profit margins continued to expand in the past several quarters. Most of the company’s peers struggled to safeguard their margins. Higher input and transportation costs and promotional spending took a toll on the company.

Mondelēz shares have risen 38.6% on a YTD (year-to-date) basis as of Friday. In comparison, General Mills stock has risen 39.1%. Hershey (HSY), J.M. Smucker (SJM), and Conagra Brands (CAG) shares have increased 29.0%, 27.8%, and 31.4%, respectively, on a YTD basis.

Expanded growth avenues supported these packaged food companies’ top-line growth and stock prices.

What’s in the offing?

We expect Mondelēz’s organic sales to sustain the momentum due to growth in its local and global brands including Oreo and Cadbury Dairy Milk. Expansion in the broader snacking category, innovation, and acquisitions are expected to support the company’s volumes. Higher pricing and a favorable mix will likely support Mondelēz’s organic sales. However, the company’s top line could continue to decline, which would reflect unfavorable currency rates.

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While we expect Mondelēz’s profit margins to benefit from improved organic sales and cost-savings, the earnings growth rate is expected to decelerate considerably. Tough YoY (year-over-year) comparisons and negative currency rates are expected to hurt the earnings growth rate, which is projected to mark low-single-digit growth.

With the expected slowdown in the EPS growth rate and the high valuation, the upside seems limited in Mondelēz stock.

High valuation

Mondelēz stock is trading at a forward PE ratio of 21.9x—which looks expensive based on its projected EPS growth of ~3% in 2019. The stock is trading higher than its average historical multiple of 20.4x.

Mondelēz stock is trading at a high multiple compared to its peers. The company’s forward PE ratio is ~34% higher than the peer average of 16.4x.

The company’s peers are trading at a lower valuation multiple. They’re expected to generate similar growth. General Mills, J.M. Smucker, Conagra Brands, Kellogg (K), and Campbell Soup (CPB) are trading at forward PE ratios of 16.1x, 14.1x, 13.4x, 14.5x, and 16.4x, respectively. Hershey stock trades at a higher valuation multiple compared to all of its peers, which could restrict the upside in its stock.

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Top line to stay muted

Mondelēz’s top line fell in the past three consecutive quarters despite continued strength in its base business. Management blamed negative currency rates for the decline. We expect weak net sales to continue in the second quarter. Analysts’ consensus estimate also indicates a YoY decrease in Mondelēz’s top line in the second quarter.

However, Mondelēz’s top line is expected to return to the growth path in the second half of this year. The company faces easier comps, but the growth rate will likely stay low. Negative currency fluctuations are expected to restrict the top-line growth.

The base business will likely benefit from the company’s higher volumes, pricing, and mix. Mondelēz’s organic sales are expected to be driven by growth in emerging markets and increased global brand sales. Mondelēz’s focus on expanding its well-being snacks portfolio is expected to support the organic sales growth. Mondelēz’s organic sales rose 8.4% in emerging markets during the last reported quarter. India, China, Russia, and Mexico recorded stellar growth.

The company’s management expects organic sales to increase 2%–3% this year. The fiscal net sales are expected to stay muted, which reflects weakness in the first half of the year.

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Earnings growth 

Mondelēz’s bottom line marked strong double-digit growth in the past several quarters. Notably, the company’s adjusted earnings grew at an average of 16.0% in the past seven quarters before the first quarter. Improved organic sales, expanded margins, share buybacks, and the lower effective tax rate drove the company’s bottom line. However, Mondelēz’s adjusted earnings growth rate moderated in the first quarter. The growth slowed down significantly due to tough YoY comparisons and the unfavorable foreign exchange rate.

Mondelēz’s adjusted EPS increased 3.2% in the first quarter, which indicates a steep decline from 12.5% growth recorded in the fourth quarter of 2018. The company’s management blamed negative currency rates following the deceleration in the growth rate. On a constant currency basis, Mondelēz’s adjusted EPS increased 12.7%.

We expect Mondelēz’s adjusted EPS growth to stay low this year compared to 2018. Tough YoY comparisons will likely restrict the company’s EPS growth. Mondelēz’s adjusted earnings are expected to take a hit due to unfavorable currency rates. However, lower taxes and share buybacks could continue to drive the company’s bottom line.

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The company’s management expects the adjusted earnings to increase 3%–5% this year on a constant-neutral basis. Improved organic sales, margin expansion, and share repurchases are expected to drive Mondelēz’s adjusted EPS. However, currency volatility is expected to hurt the adjusted earnings by $0.09 per share this year.

Limited upside in Mondelēz stock

Analysts’ consensus target price on Mondelēz stock indicates a limited upside. Analysts have a target price of $57.21 per share on Mondelēz, which implies a potential upside of ~3% based on its closing price of $55.50 on Friday.

However, most of the analysts maintained a positive outlook on Mondelēz stock. Among the 21 analysts tracking the stock, 16 recommended a “buy,” while five recommended a “hold.”


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