The Future Looks Rosy for this Snack Company

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

Despite missing top line expectations in 3Q 2012, I think the growth story of Mondelez International (NASDAQ: MDLZ) will continue. The major reasons behind falling short of analyst expectations are their faulty executions in Brazil and Russia, which I believe were due to slow reflexes. In Brazil, the softening gum category led to a higher build up in inventory levels, which was very lately observed. And in Russia, the price gaps that developed between coffee and chocolate got a very slow response. With all corrective steps already taken, I anticipate things will improve in upcoming quarters. On the other hand, with other developing markets (China, India, Middle East and Africa), and Europe currently doing alright, I think investors shouldn’t worry too much. Even though the top line was impacted by deflationary lower coffee costs pressure in Europe, Mondelez was still able to increase sale in 3Q 2012 with two thirds of its product line gaining market share.

Talking about its competitors, Kellogg Company (NYSE: K) it is trying to maintain its dominant position by adding new flavors. The company introduced new products in its breakfast category, with a variety of cereals and Pop tarts that includes Special K Chocolaty Strawberry cereal and Kellogg’ Scooby Doo cereal. Additionally, it introduced a limited edition Pringles crisp for the holiday season with more than 80 varieties all across the globe. This innovative offering by Kellogg should meet the consumers’ craving for new and different flavors. I think this is a good move, as it is supported by an increase in its marketing spending of ~13% in 2013, with most of the spending made on its newly acquired Pringles business .

On the other hand, ConAgra Foods (NYSE: CAG) recently acquired Ralcorp Holdings for $5 billion with an intent to establish its position in the private label business. Ralcorp is a leader in private label brands such as pasta, cereals, jam, jellies and crackers, and the private label business is growing twice as fast compared to the popular brands. The company expects to generate ~18 billion of sales yearly. Moreover, ConAgra is concentrating more on its international growth, which currently contributes only ~10% to its sales. The company announced a five year growth plan in 2012, with its major focus on India by making acquisitions. ConAgra now owns a majority stake in the Indian firm Agro Tech by virtue of its 50% ownership.

Focusing back on Mondelez, I feel this company will continue to maintain its strong foothold in the industry. It already has a unique competitive advantage from its famous brands like Oreo, Cadbury chocolates, and Trident Gum, and the below mentioned fundamentals will add more value to its stock.

Gains from developing markets: Mondelez generates ~44% of its revenue from the developing markets of India, China, Russia and Brazil and thus keeps making continuous efforts for its growth in these markets. The company is eying an expansion into India and Africa and has decided to make $400 million in investment in these regions for cocoa production for the next ten years. It will be working along with the local producers of cocoa in these countries. I see significant growth with this expansion, as the Indian market has been growing ~25% to ~30% per year for last few years. Mondelez holds a leadership position in the chocolate category, with ~70% share in India and with 6% to 7% of share in biscuits.

Acquisition of Vitasnella Snack business: Mondelez derives ~75% of its total sales from snacks. And to make this business more strong it acquired Italy's Vitasnella snack brand. The snacking sector is growing at a fast pace, and more and more people are now opting for a low calorie snack that keeps their weight under control. I think Mondelez made the correct decision by acquiring Vitasnella, as Vitasnella is best known for its low fat products like biscuits, breads, and snacks. The company has decided to manufacture biscuits and crackers in its manufacturing plant in Italy while producing other snack food in France and Portugal. 

What Investors can expect for 2013-14?

Summing up, I estimate Mondelez will grow in 2013-14 over developing markets, as well as experience margin expansion overseas. The achievement of organic revenue growth to ~6% shouldn’t be an issue for this company. We can anticipate Mondelez to generate a free cash flow of ~$1.5 billion for FY13 and $1.7 billion for FY14. Priority uses of cash flow should comprise reinvesting in the business to drive top-tier growth, M&A, returning capital to shareholders through share repurchases and dividends, and paying down debt. 

ShwetaDubey has no positions in the stocks mentioned above. 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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