On Jan 14, we issued an updated research report on Mondelez International, Inc. (MDLZ).
Mondelez has been reporting disappointing top-line results since it split from Kraft Foods Group, Inc. (KRFT) in 2012. Category slowdown in many of the emerging markets and slide in coffee prices (due to pass through of lower green coffee costs) hurt the company’s revenues in 2013 as well as the first half of 2014. Mondelez’s categories slowed down to less than 4% in 2013 versus 6% in 2012 due to soft global retail and consumer demand.
In fact, in the first nine months of 2014, the company trailed category growth, recording organic growth of just over 2%, much less than overall category growth of 3.5%. The difference primarily resulted from volume losses due to significant chocolate pricing and French trade dispute in the second and third quarters of 2014.
Pricing increased 3.6% and 5.8% in the second and third quarters, respectively, as management increased the prices of most of its products throughout the year to cover higher commodity costs. Though Mondelez increased the pricing in all the categories, it saw the most significant pricing action in chocolate and coffee given the steep rise in both cocoa and green coffee costs.
However, its competitors were slow in raising the prices which led to market share losses and pricing-related retailer customer disputes in many markets, especially France in the second and third quarters.
These issues are expected to continue to hurt sales in the fourth quarter as well.
In fact, management cut the 2014 top-line outlook twice in 2014 due to snacking category weakness. The category growth is not expected to improve in 2015, while the retail and consumer environment remain challenging.
The company’s gum business has also been declining for the last few quarters, mainly in the developed nations of the U.S. and Europe.
Despite top-line weakness, the company has been consistently improving margins through cost cuts and productivity gains.
Moreover, the company raised the full-year profit outlook concurrent with the third-quarter results following three consecutive quarters of double-digit earnings growth. Lower-than-expected tax rate, favorable interest expenses and productivity gains and cost savings led to the increase in earnings guidance.
Its strong portfolio of iconic brands, presence in impulsive categories and commanding presence in the fast growing emerging markets also keeps our faith in the stock.
Stocks to Consider
Mondelez carries a Zacks Rank #3 (Hold). Better-ranked food stocks include SUPERVALU Inc. (SVU) and Pinnacle Foods Inc. (PF). While SUPERVALU sports a Zacks Rank #1 (Strong Buy), Pinnacle Foods has a Zacks Rank #2 (Buy).
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