We expect food company, Mondelez International, Inc. (MDLZ), to beat expectations when it reports fourth-quarter and full-year 2013 results on Feb 12. Last quarter, it posted in-line results. Let’s see how things are shaping up for this announcement.
Why a Likely Positive Surprise?
Our proven model shows that Mondelez is likely to beat earnings because it has the right combination of the two key ingredients.
Positive Zacks ESP: Expected Surprise Prediction or Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +2.27%. This is very meaningful and a leading indicator of a likely positive earnings surprise for shares.
Zacks Rank: Mondelez carries a Zacks Rank #3 (Hold) which, when combined with +2.27% ESP, makes us confident about a positive earnings beat.
Note that stocks with Zacks Ranks #1, 2 or 3 have a significantly higher chance of beating earnings. The Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.
What is Driving the Better-Than-Expected Earnings?
Mondelez has reported disappointing top-line results since its split from Kraft Foods Group, Inc. (KRFT) in Oct 2012. In the third quarter of 2013, slower global category growth, lower coffee pricing and weak China sales hurt the top line. These headwinds are expected to persist in the fourth quarter as well, thus putting pressure on the top line. Accordingly, net revenue for the fourth quarter is expected to decline in low single-digits while organic revenue is expected to increase about 3%.
However, Mondelez has tremendous margin expansion potential. In the fourth quarter, operating margins are expected to be above 13%, better than the third quarter and the full-year expectations. The top-line headwinds are expected to be partially offset by high cost savings and improved productivity.
Also, in Dec 2013, the company announced a massive $1.7 billion share buyback plan which will be funded by the net proceeds of the arbitration award that Starbucks will pay under a dispute settlement announced in November. The share buybacks should also boost earnings.
Other Stocks to Consider
Other stocks in the food industry that have both a positive earnings ESP and a favorable Zacks Rank are:
ConAgra Foods, Inc. (CAG), with Earnings ESP of +1.54% and a Zacks Rank #2 (Buy).
PepsiCo, Inc.(PEP), with Earnings ESP of +1.98% and a Zacks Rank #3.
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