One Spinoff That is Severely Overlooked

Meena 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) is a global snack food company formerly known as Kraft Foods. Earlier this year, Mondelez spun off its North American grocery business, which now trades as Kraft Foods Group (NASDAQ: KRFT).

Mondelez’s business is expected to generate upwards of $36 billion in revenue this year, where over 80% is derived from outside of North America. We are also reinforced by Mondelez’s exposure to high-growth markets – Latin America and Asia – which should make up close to 45% of revenues. Warren Buffett remains the top fund owner of Mondelez despite an almost 50% selloff of his shares last quarter (see Warren Buffett's newest picks).

Mondelez's outlook is much better following the split, where it appears to be the quintessential growth play and Kraft Foods Group the dividend-payer - KRFT currently pays a massive dividend yield of 4.4%. Offering further growth potential for Mondelez is the integration of its 2010 acquisition of confectionery company Cadbury.

What is most intriguing about Mondelez is its overwhelmingly cheap valuation. The food company trades at 14x earnings and a P/S of only 0.9x – both the cheapest of the five food stocks mentioned here. Given Mondelez’s industry-low debt ratio of 30% and industry-high 5-year expected EPS growth, we believe that the food company should trade more in line with its peers, say an average of 1.5x sales. Placing a 1.5x P/S on Mondelez’s year-ahead top line estimates shows potential upside of 20%.

How does Mondelez stack up against key competitors?

J&J Snack Foods (NASDAQ: JJSF) pays the cheapest dividend among the five stocks listed with a yield of 1%. This food company also has the highest P/E at 22x and the lowest 5-year expected earnings growth rate (6%). This puts its PEG well above 3.0, making JJSF one of the most expensive food stocks on a valuation basis. Despite weak interest from hedge funds, billionaire Jim Simons is still one the big-name J&J investors (check out Jim Simons' top picks).

General Mills (NYSE: GIS) is one of the more intriguing stability plays in the industry with a 0.1 beta and a high dividend yield of 3.2%. An industry-low debt ratio of 36% is another reason why General Mills could be a solid portfolio addition. Holding General Mills back, though, is its industry-high P/S of 1.6x and P/E of 15x.

Kellogg (NYSE: K), meanwhile, pays a solid dividend yield of 3.1% The stock sports a P/E ratio of 17x - above its top dividend-paying competitor General Mills, but Kellogg’s debt ratio is over 50%.

Kraft is now focused on North American operations and pays a superb dividend yield of 4.4%. Of course, holding Kraft back is its high valuation - 1.4x sales and 17x forward earnings – and industry-low 5-year expected earnings growth of only 6%. Billionaire Ken Griffin - founder of Citadel Investment Group - was a big shareholder jumping into Kraft with a new position of 1.7 million shares in 3Q (check out Ken Griffin's new picks).

We believe that Mondelez is one of the top foods stocks available, offering investors a solid dividend and robust growth at a very good price. Driving this is Mondelez’s top-notch balance sheet and solid profitability (14% operating margin). With over $3.8 billion in cash, the food company also has solid prospects for future acquisitions and dividend increases.

This article is written by Marshall Hargrave and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. 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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