This Double Stuffed SWOT Signals a Buy

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

One of the simplest ways to get an overview of a company's operations is through a SWOT analysis.  Here the main strengths, weaknesses, opportunities, and threats of the company are laid out for all to see.

Today we will take a look at Mondelez (NASDAQ: MDLZ), as it settles into its newly created existence as an international snack brand.  After posting a 10% share price increase over the last week, we will see if the company's SWOT analysis and valuations show further room for growth.

Strengths:

Billion-Dollar Brands- Mondelez is the proud owner of 8 billion-dollar brands, including Cadbury and Milka chocolates, Jacobs coffee, Tang beverages, LU, Oreo and Nabisco biscuits, and Trident gum.

Geographic Reach- Operating in more that 80 countries, Mondelez boasts an enormous moat and draws 40% of its revenues from developing markets, an area it has continually expanded upon.

Pricing Power- With such powerful brands Mondelez is able to pass along modest price increases to fight inflation and tough economic conditions.  European and North American operating income margins grew to 13.6 and 16.6%, respectively, in the 3rd quarter, while the developing markets margin was steady at 15.2%.

A New Focus- Having successfully spun off from its parent company Kraft (NASDAQ: KRFT), Mondelez is able to focus entirely on its international growth runway.

Weaknesses:

Pension Funding- With net pension costs of  $500-$600 million a year while incorporated with Kraft, Mondelez will face the continued challenge of funding a pension plan while returning extra cash to shareholders.

Skinny Profits- Posting a Profit Margin of 6.2%, Mondelez lags behind its former parent company Kraft, along with competitors Hershey's (NYSE: HSY) and Tootsie Roll (NYSE: TR), as they post margins of 17%, 10%, and 9%, respectively.

Heavy Debt Load- With $3.96 billion cash on hand versus $30 billion in debt, Mondelez has a Debt/Equity ratio of 82, a daunting ratio regardless of their ability to generate cash.  However, the company appears to be in a better debt situation in comparison to Kraft after the spin-off, as their Debt/Equity is 128.

Opportunities:

Developing Markets- Mondelez targets high single digit growth rates for the foreseeable future in its developing markets segment.  Despite already accounting for 40% of company revenues, it remains the biggest growth runway for Mondelez.

Synergies- Through the spin-off, Mondelez will remove a lot of unnecessary overhead, which will boost margins once merger costs are settled.  By separating itself from Kraft, they will be able to truly focus on growth abroad, financially and operationally.

 Acquisitions- With its almost $4 billion cash on hand, Mondelez will not be afraid to make acquisitions.  In October they added Italy's Vitasnella to improve its biscuit business overseas.  Combining that with its Cadbury acquisition under Kraft, it is clear to see that Mondelez is willing to pursue growth through acquisitions.

Threats:

Spin-off Finalization- It is vital that Mondelez finishes its spin-off from Kraft effectively and is able to harness its newly created synergies.  By adding Cadbury in 2010, only to later spin off its snacks business in 2012, it willl remain essential for Mondelez to ensure that these moves generate increased returns for shareholders.

International Risk Factors- Whether it is currency exchange rates, political risk, regulatory risk, or just plain economic risk in over 80 countries, Mondelez will constantly faces challenges with its growing international base.

Pension Funding- If Mondelez is unable to set aside the previously mentioned large sums of money to fund its pension, it could be forced to take drastic measures to raise cash.

Competition- With competitors such as Hersheys and Tootsie Roll, Mondelez will struggle to gain ground in the North American confectionery market.  Furthermore, with 40% of its international revenue coming from its chocolates, Mondelez will need to fend off a large number of confectionery creators in order to continue their international success.  

Valuations

As with any investment, I like to look at a company's current valuations in comparison to their historical averages and those of its peers.  Here are a few major metrics I like to check on:

<table> <tbody> <tr> <td><strong>Company</strong></td> <td><strong>Forward P/E</strong></td> <td><strong>5 Yr P/E Avg</strong></td> <td><strong>Price/Cash Flow</strong></td> <td><strong>5 Yr P/CF Avg</strong></td> <td><strong>5 Yr PEG</strong></td> <td><strong>Cash/Debt</strong></td> <td><strong>Dividend %</strong></td> </tr> <tr> <td><strong>Mondelez</strong></td> <td>17.5</td> <td>17.9*</td> <td>9.8</td> <td>12.7*</td> <td>1.62</td> <td>4B/30B</td> <td>1.9%</td> </tr> <tr> <td><strong>Kraft</strong></td> <td>17.7</td> <td>17.9*</td> <td>10.3</td> <td>12.7*</td> <td>4.98</td> <td>244M/9.5B</td> <td>4.3%</td> </tr> <tr> <td><strong>Hershey</strong></td> <td>21.2</td> <td>22.7</td> <td>18.8</td> <td>18.1</td> <td>2.40</td> <td>466M/1.99B</td> <td>2.1%</td> </tr> <tr> <td><strong>Tootsie Roll</strong></td> <td>28.8</td> <td>31.7</td> <td>17.2</td> <td>21.4</td> <td>No Value</td> <td>52M/8M</td> <td>1.2%</td> </tr> </tbody> </table>

*Derived from Kraft's 5 Year Averages

The first thing that caught my attention was the Forward P/E of 17.5 at Mondelez.  Not only is the company the cheapest of the group in regards to this simple metric, but it actually trades at roughly the same multiple as it had with Kraft before the spin-off.  

By leaving behind its low growth North American grocery business, Mondelez is trading at an attractive valuation in comparison to Kraft, as it holds the true growth potential with its international snack business.  This can clearly be seen though the company's 5 Year PEG, as Mondelez comes in with the lowest of the group.

Furthermore, not only do Hersheys and Mondelez offer the best growth opportunities of the group, they each offer a 2% dividend in addition.  While Hersheys also boasts a rapidly growing international business, Mondelez is trading at a much more appealing valuation with a Forward P/E of 17 and a P/Cash Flow of 10 versus Hersheys Forward P/E of 21 and P/CF of 19.

With this SWOT analysis and these valuations in mind, I believe that growth story at Mondelez is undervalued and worthy of a CAPS green-thumb for the long term future.


joryko has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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