This Food Spin-Off Has Growth Potential

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Another week, another food stock to analyze. It’s not only that I quite like food in general, but as I have said before, it is a sector that continues to hold its own throughout the crisis. Not too long ago, Kraft (NASDAQ: KRFT) foods separated its North American supermarket supplier division from the rest of its activities, that have now been incorporated in Mondelez International (NASDAQ: MDLZ). Mondelez is now a pretty serious player in its own right, and aside from its very reasonable valuation, offers strong growth potential in a number of markets.

Company Profile

Mondelez International, with a sizable market cap of around $46 billion, employs around 126,000 people worldwide. This food giant operates mainly in the snack division, producing biscuits, cookies, crackers, chocolates and gums, among other tasty offerings. Its brands include big names such as Oreo, Cadbury, Trident and Tang. The stock is up 10% in the last twelve months, and has a beta of only .53. Additionally, the stock yields about 2%.

Earnings and Growth Potential

Much of this company’s strength derives from its global presence, and especially its position in emerging markets that account for about 45% of revenue. Also, its focus on snacks, usually a fast-growing segment, should support revenue growth in the future. Due to its size, the company offers a fairly unique mix between scale advantages on the one hand, and high growth in emerging markets on the other hand. As such, it is one par with food giant Unilever (NYSE: UN), which also has a very strong presence in emerging markets, but isn’t as focused on snack foods.

Q3 2012 earnings weren’t stellar, with revenue down about 5% in no small part due to negative currency translation. Because Mondelez operates internationally, it is sensitive to these Forex fluctuations. However, underlying revenue growth was about 1.5% and EBIT margin was up to 13.1%. The company hopes to maintain future revenue growth of between 5% and 7%. The outlook for 2013 and stable expecting EPS of between $1.50 and $1.55.

Valuations and Metrics

Mondelez trades at 13.93x earnings, just under the 15.23x industry average. The price to book is also quite low at 1.27 and the price to sales is only 0.86. The operating margin is decent at around 14%, but return on equity is a bit low at 9.14%. Debt is a bit of an issue with a total debt to equity ratio of over 80. Still, the company is available at a substantial discount to competitor Unilever, whose stock trades at over 20x earnings and with a price to book of almost 6. In fact, Mondelez is quite inexpensive compared to the food sector and the broader market.

Bottom Line

Having recently split off from Kraft, which continues its North American food operations, Mondelez is now responsible for the international operations of the conglomerate. With an interesting mix of size and growth potential, the company looks like it might be able to deliver strong growth in years to come while maintaining its competitive edge. Also, it is currently trading at low multiples, which may provide a compelling entry-point. 

DUJames is long UN. The Motley Fool has no positions in the stocks mentioned above. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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