On Sep 30, 2014, we issued an updated research report on Mondelez International, Inc. (MDLZ).
On Aug 6, Mondelez announced weak second-quarter 2014 results wherein the earnings beat the Zacks Consensus Estimate only by a penny but revenues missed the same. Adjusted earnings of 40 cents increased 11.1% year over year as higher operating margins and lower share count and interest expenses made up for the weak revenues and high input costs.
Revenues declined 1.8% due to volume erosion resulting from significant pricing action in response to the rising input costs. Rising input costs are negatively impacting the food industry. Mondelez’s input costs began to creep up at the end of 2013, especially in dairy and cocoa. Management thus increased the prices of most of its products in the first half of this year to cover higher commodity costs. However, competitors were slow in increasing prices which resulted in market share losses and pricing related disputes with retailer customers mainly in Europe, which in turn dented the top line.
In fact, the snacking giant’s top line has remained weak ever since it separated from Kraft Foods Group, Inc. (KRFT). Weak biscuit sales in China, continued headwinds from lower coffee pricing (due to pass through of lower green coffee costs) and category slowdown in many of the emerging markets hurt the company’s top line in 2013 and the first half of 2014. Management cut the 2014 top-line outlook twice in the first half of 2014 due to snacking category weakness. Though rising coffee prices and favorable comparisons in China are expected to benefit the top line in the second half, management expects the challenging retail and consumer environment to continue.
However, despite top-line weakness, the company has been consistently improving margins through cost cuts and productivity gains. Its strong portfolio of iconic brands, presence in impulsive categories and commanding presence in the fast growing emerging markets keeps our faith in the stock.
Like Mondelez, other food companies that have been struggling with the top line are Kellogg Company (K) and General Mills, Inc (GIS). Both the companies’ revenues have been sluggish so far this year due to lagging U.S. sales.
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