Will Productivity Savings Aid Mondelez’s (MDLZ) Q4 Earnings?

Mondelez International, Inc. MDLZ is set to report fourth-quarter 2017 results on Jan 31, after market close.

The company delivered a positive earnings surprise of 5.56% last quarter. The company surpassed estimates in three of the trailing four quarters, the average positive surprise being 2.96%.

Mondelez has been facing challenges to boost its volume since 2014, primarily due to soft consumer demand. In fact, the food industry, which includes legacy brands like General Mills Inc. GIS, The Kraft Heinz Company KHC and The Kellogg Company K, has been giving a dismal performance for quite some time to boost sales. Mondelez, in particular, witnessed a decline in revenues in nine out of the last 10 quarters, primarily due to lower demand. Mondelez’s sales and volumes were down 1.2% and 0.9%, respectively, and in the first nine months of 2017.

Resultantly, the company’s share price has advanced only 0.9% in the last six months, underperforming the industry’s 2.6% growth.

Let’s See How Things Are Shaping Up for Q4

In the last reported quarter, Mondelez’s net revenues increased 2.1% year over year on organic revenue growth and currency tailwinds. Revenues from emerging and developed markets increased 4.5% and 0.7%, respectively. Power Brands also witnessed a 5.6% increase in revenues.

The trend is expected to continue in the to-be-reported quarter with improved volumes in its Power Brands, which includes Oreo, Cadbury Diary Milk, Halls and Tang. Higher sales from its wellness product portfolio is also anticipated to support its revenue growth. Further, improvements in China, Europe, Russia and India along with strong pricing in emerging markets are added positives.

However, softness in North America due to a tough retail environment will mar the growth rate to some extent. Again, weakness in the Middle East is also expected to hurt the company’s sales.

Segment Wise: Mondelez’s Europe revenues, comprising about 36.9% of the total revenues, are likely to witness 15% growth sequentially and 4.7% year over year to $2.8 billion. North America segment, comprising about 27.7% of the total revenues, is expected to witness growth in the fourth quarter. The Zacks Consensus Estimate of $1.83 billion for the segment’s revenues reflect growth from $1.77 billion in the prior quarter and $1.81 billion in the year-ago quarter.

Latin America revenues of $910 million indicates an increase from $908 million in the prior quarter and $864 million in the prior-year quarter.

Coming to the company’s bottom line, the snacks giant surpassed analysts’ expectations for earnings in eight of the past 10 quarters. Despite lower sales growth, the company has managed to boost its profit level, banking on effective promotional strategies, introduction of nutritious products, cost-saving and restructuring initiatives that benefited it at large.

However, higher commodity prices, primarily on dairy products, and increased trade spending are likely to adversely impact its gross margins. Then again, the company’s zero-based budgeting program, productivity savings and lower overhead costs are expected to boost its operating margin.

Hence, fourth-quarter bottom line is expected to witness solid growth from higher pricing, higher volumes as well as lower overhead and increased productivity savings, partly offset by higher input costs.

For the fourth quarter, the Zacks Consensus Estimate for earnings is pegged at 56 cents, reflecting a 19.2% year-over-year increase. Meanwhile, the Zacks Consensus Estimate for total revenues is pegged at $6.98 billion, implying 3.1% growth.

Quantitative Model Prediction

Here is what our quantitative model predicts:

Mondelez does not have the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — to increase the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks ESP: Mondelez has an Earnings ESP of -0.58%.

Zacks Rank: Mondelez carries a Zacks Rank #3, which increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of an earnings surprise.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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