Mondelēz: What Can Investors Expect in Q2?

  • Mondelēz is scheduled to announce its second-quarter earnings on July 30.
  • The company’s net sales might continue to decline. However, underlying sales are expected to sustain the momentum.
  • Tough YoY comparisons will likey restrict the company’s earnings growth. Low earnings growth and the high valuation concern investors.

Mondelēz International (MDLZ) is scheduled to report its second-quarter result after the markets close on July 30. We expect organic sales and the adjusted EPS to improve YoY (year-over-year). However, the growth pace will likely stay low.

So far, Mondelēz stock has risen 35.9% this year. Continued strength in the base volumes and increased pricing supported the company’s organic sales and shares. Mondelēz focused on expanding its well-being snacks portfolio, which supported its growth. The company’s performance on the margins was exceptional. The margins grew in the past several quarters despite cost headwinds. Most of the packaged food companies continued to struggle on the margins front during the same period.

Mondelēz’s low net sales 

Mondelēz’s top line decreased in the past three quarters. Unfavorable currency exchange rates dragged the net sales down. We expect the company’s top line to fall in the second quarter, which reflects currency volatility. Analysts expect Mondelēz to post net sales of $6.03 billion in the second quarter, which implies a decrease of 1.3% YoY.

Mondelēz: What Can Investors Expect in Q2?

However, we expect the company’s organic sales to continue to gain due to higher volumes, pricing, and a favorable mix. Strength in emerging markets and an increase in global brand sales, including Oreo and Cadbury Dairy Milk, are expected to support the company’s sales. During the last reported quarter, Mondelēz’s organic sales increased 8.4% in emerging markets. India, Russia, Mexico, and China recorded stellar growth. Expanding the “well-being” snacks portfolio will likely support the company’s organic sales.

EPS growth to moderate

Mondelēz beat analysts’ EPS estimate in the first quarter. However, the earnings growth rate moderated significantly. The company is up against tough comparisons YoY. We expect the EPS growth rate to decelerate more in the second quarter.

Mondelēz: What Can Investors Expect in Q2?

Analysts expect Mondelēz to post an adjusted EPS of $0.57—up 1.8% YoY. The projected growth rate is nearly half of what the company achieved in the first quarter. Growth in organic sales, margin improvement, and a lower effective tax rate will likely drive Mondelēz’s earnings. Share repurchases will likely support the company’s EPS growth. However, the second-quarter EPS faces tough comparisons. The company’s adjusted EPS rose 16.7% in the second quarter of 2018.

Negative currency rates will likely play spoilsport. Management expects currency fluctuations to have a negative impact on the EPS by $0.09 in 2019.

Valuation doesn’t look attractive

Mondelēz stock trades at 21.8x its 2019 estimated EPS of $2.50. The stock looks expensive based on its projected EPS growth rate of about 3%. The stock is trading at a significant premium to most of its peers. Conagra Brands, J.M. Smucker, and General Mills shares trade at a forward PE ratio of 13.7x, 13.2x, and 15.7x, respectively, and offer similar growth.