6 Reasons Why I Am Bullish on This Newly Formed Old Company

Rita is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Mondelez International (NASDAQ: MDLZ), the newly formed company that emerged from the recent spin-off of Kraft Foods, is looking pretty attractive to me. On October 1, 2012, Kraft Foods, which previously used to trade under the ticker symbol KFT, split into Mondelez, the world’s biggest chocolate, candy and biscuit maker, and Kraft Foods Group (NASDAQ: KRFT), which includes the North American grocery brands such as Velvetta, Miracle Whip and Oscar Mayer.

MDLZ’s management has strong plans for the company, and this is building confidence in investors. The chocolate maker has already started attracting investors' attention as it made its first post-split purchase by buying Vitasnella, an Italian snack maker. Let me tell you what all makes me bullish on this company.

Investment Positives
A. Rock-solid product portfolio

Though Mondelez is a newly formed company, its products have been around for a considerable length of time and are pretty popular among consumers. The company’s brand portfolio includes some very popular brands, such as Cadbury, Oreo, LU, Milka and Chips Ahoy, making the company a worldwide leader in chocolates, biscuits and candy. Mondelez also enjoys a dominant position in the gum and coffee markets. The company’s strong product portfolio coupled with its diversified geographical revenue base provides Mondelez a unique position with massive growth opportunities.

<img src="/media/images/user_13114/mdlz_products_large.jpg" />

(Source: Mondelez Fact Sheet)

B. Excellent market exposure

In my previous point, I mentioned that Mondelez benefits from having a diversified geographical revenue base. The company has operations in more than 80 countries with noteworthy exposure in the emerging markets. As of now, management expects to derive almost 44% of total revenues from the emerging markets and the contribution is expected to move above 50% in the coming years as a significant expansion in the global middle class is observed. 

C. Growth plans

Plans related to both organic and inorganic growth are in the cards for Mondelez. While the company focuses on organic growth to expand its operations, it will also carry out acquisitions in the emerging markets. Last month, just before the spin-off, Kraft Foods had signed a deal to acquire full control of Bima, a Morocco based cookie maker. Prior to the deal, Kraft had a 50% stake in Bimo. If the deal gets the approval of the regulatory bodies, Bimo, with its 13% market share of Morocco’s cookie market, will help Mondelez gain a strong position in the space.

D. Market growth

Mondelez segregates its markets into three categories – BRIC, Next Wave and Scale.  Management expects each of these markets to grow substantially in the coming years, and this will automatically benefit the company as it enjoys good exposure in these geographic spaces. BRIC markets account for almost 33% of developing markets, and management expects this segment to grow by 15%-19% in the next five years. A similar growth is expected for the Next Wave market, which includes the Middle East, Africa and Indonesia. However, management expects a slower growth in the Scale markets and expects the figure to be in low to high single digits.

<img src="/media/images/user_13114/mdlz_fact-sheet_large.jpg" />

(Source: Mondelez Fact Sheet)

E. Strong expected financials

The expected annual revenue for Mondelez is $36 billion and the company is also expected to grow its top line at a steady 5%-7% rate in the next few years. Management also expects the chocolate, biscuit and gum markets to contribute as much as 75% of its revenues. Again, in 2013 $3.5 billion of debt is expected to mature, and the company is expected to reduce its outstanding debt by $2 billion.

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>Mondelez</strong></p> </td> <td> <p><strong>Kellogg</strong> <span class="ticker" data-id="204153">(NYSE: <a href="http://caps.fool.com/Ticker/K.aspx">K</a>)</span></p> </td> <td> <p><strong>General Mills</strong> <span class="ticker" data-id="203742">(NYSE: <a href="http://caps.fool.com/Ticker/GIS.aspx">GIS</a>)</span></p> </td> <td> <p><strong>H. J. Heinz</strong> <span class="ticker" data-id="203875">(NYSE: <a href="http://caps.fool.com/Ticker/HNZ.aspx">HNZ</a>)</span></p> </td> </tr> <tr> <td> <p>Forward P/E</p> </td> <td> <p>17.5x</p> </td> <td> <p>14.5x</p> </td> <td> <p>14.0x</p> </td> <td> <p>15.2x</p> </td> </tr> <tr> <td> <p>Expected 5 year growth rate</p> </td> <td> <p>12.0%</p> </td> <td> <p>6.0%</p> </td> <td> <p>7.2%</p> </td> <td> <p>7.5%</p> </td> </tr> <tr> <td> <p>PEG</p> </td> <td> <p>1.49</p> </td> <td> <p>2.42</p> </td> <td> <p>1.94</p> </td> <td> <p>2.03</p> </td> </tr> </tbody> </table>

(Source: Yahoo Finance and personal estimates)

From the above chart, one may feel that Mondelez’s forward P/E of 17.5x is at a premium compared to its peers. But, a look at the company’s expected growth rate over the next five years tells us why the forward P/E is such. Obviously the future growth prospects have been factored into the stock. Now, considering the growth the stock will provide, Mondelez’s PEG of 1.49 tells us that the stock is cheaper than its peers.

F. Treat for investors

As per the guidance available from its management, Mondelez is expected to provide EPS of $1.50-$1.55 in 2013. The company is also expected to pay dividends of $0.52-$0.55 per share, taking the dividend yield to almost 2%. Considering the low to mid double digit growth which the stock has to offer in the coming years, the dividend yield of 2% is looking attractive. Again, in the coming years, the company is expected to have $1.75 billion worth of free cash flow and dividend payments of above $900 million. These estimates suggest that the company will be in a strong position to carry on its dividends going forward.

Concluding thoughts
Kraft’s split into Mondelez and Kraft Foods Group has positive implications for both companies, as now the respective managements can focus more on their core areas and thus pave the path for growth. The move is expected to improve shareholders' wealth for both firms and benefit investors in the long run. The only drawback at the moment is the $0.15 per share blow to earnings that the company might have to face in 2013, due only to the changes in currency rates. All this makes me pretty bullish on the chocolate maker. What about you?


analyse360degree has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend H.J. Heinz Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus