Can Mondelez Win Its Bet on Emerging Markets?
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Mondelez (NASDAQ: MDLZ) is a leading company in the international confectionery arena with 30% of the gum category, 15% share of the chocolate market, and 7% of the candy aisle worldwide. Mondelez also holds the biscuit category with 18% of the market share. In addition, the company also has a leading share of 16% in the powdered-beverage arena.
On the whole, its portfolio includes a number of well-known brands such as Oreo, Cadbury, Nabisco, Trident, and Tang. All these elements give Mondelez an upper hand over its competitors.
Additionally, Mondelez has considerable emerging market exposure, which can fuel growth for the company. By betting on emerging markets, Mondelez is anticipating growing its top line by 5% to 7%, while the bottom line growth will be in the double-digit range in the long run. Yahoo! analysts are predicting the coming five-year growth rate to be 12.5% per year. Therefore, I believe Mondelez could be a top-notch story in the next five years.
Growth investments in emerging markets
Emerging markets are turning out to be an essential tool for companies operating in the confectioners industry. Many companies in this industry are finding emerging markets attractive. Consequently, competition will likely to increase in the short run. Mondelez is also seeking to capture its market share in these emerging markets to achieve 5% to 7% organic revenue growth.
The company is investing heavily in new emerging markets to generate attractive returns. This year, the company is looking to invest $100 million in these markets, which will gradually increase to $300 million in 2015. Mondelez has a smart investment strategy. It will use the following investment strategy, which will fall into three buckets.
Firstly, the company is seeking to boost its marketing and trade support behind global innovation platforms and Power Brands. Secondly, the company is seeking to expand coverage of outlets by adding route-to-market and sales capabilities. In the final step, Mondelez will capitalize on "white space" opportunities by entering emerging markets with new products, like a recent launch of Stride gum in China.
Mondelez is a financially solid company with strong brands. Therefore, it’s in a solid position to make quality investments for profitable growth. The company's unrivaled portfolio of iconic brands, snacks categories, strong routes to market and geographic footprint, and proven innovation platforms will aid it in achieving its required targets.
Margin expansion in North America and Europe
Along with investment in emerging markets, Mondelez is looking to continue its restructuring program. The company is looking to enhance margins in both America and European regions. In these two regions, Mondelez will improve its mix by concentrating on growing its Power Brands, which naturally have gross margins that are 100-to-200 basis points higher than other brands. Particularly in North America, Mondelez is looking to enhance margins by 500 basis points. To do this, the company will reinvent in its supply-chain network combined with introducing new production lines. The company will also take cost-cutting measures to enhance margins.
Mondelez’s main industry peers are the Hershey (NYSE: HSY) and Kellogg (NYSE: K). Hershey offers chocolate and confectionery products. Its products have solid demand all over the world. Due to a strong product portfolio, its turnover in fiscal year 2012 was over $6 billion. The company continues to expect 2013 net sales growth of 5% to 7%. It is seeking to drive sales by the U.S. launch of the Brookside product line, as well as innovation such as Kit Kat Minis and Jolly Rancher Bites in the U.S.
Further, the company is seeking to expand its five core global brands in international markets. However, cocoa processors have been hit by weak prices for cocoa ingredients such as cocoa butter, liquor and powder. Recently, Archer Daniels Midland announced plans to sell its cocoa unit, which is worth $2 billion. Hershey, on the other hand, launched CocoaLink mobile technology to help farmers in producing greater quantities and a higher quality of cocoa. With a strong product portfolio and a solid financial situation, the company can certainly be a good long-term purchase.
Kellogg manufactures and markets ready-to-eat cereal and convenience foods. Its solid brand portfolio and global exposure continue generating solid returns for shareholders. The company offers a delightful dividend yield of 2.7%. Along with solid dividends, the company’s price increased by nearly 30% over the past year.
Kellogg has a strong financial position to sustain returns. At the end of the recent quarter, it showed comparable revenue growth in many regions all over the world. With solid results from the Pringles' business, Kellogg has been able to increase revenue by 12%.
Kellogg’s management has shown smart moves in the recent past to enhance growth and reduce debt. The management suspended its buyback program to finance the Pringles' acquisition to confirm future growth while using the remaining funds for debt reduction. This purchase led the company to grow its top line by 12%. The Pringles purchase also helps it to capture the snack food market and confirms strong future growth.
Secondly, Kellogg’s management suspended its buyback program for debt reduction. At the moment, it has an extremely high debt-to-equity ratio of 2.4. However, its current ratio of slightly less than 1.0 suggests that it has sufficient funds to pay current liabilities. On the whole, its business segments are generating increasing sales and earnings. It is on track to achieve 8% growth in 2013 with EPS growth of 5% to 7%.
I believe Mondelez current organic revenue growth of 3.8% symbolizes its ability to achieve its target of 5% to 7% organic growth. Its 9.3% increase in revenue from emerging markets is encouraging. The company is generating double-digit gains in China, Brazil, and India and continues to see improvement in Russia. Mondelez is well positioned to generate solid returns for investors with a focus on emerging markets and margin expansion.
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