19% Upside on This Food Giant
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Mondelez International (NASDAQ: MDLZ) is an American multinational confectionery, food, and beverage conglomerate. The company owns major global snacking and food brands including Cadbury and Milka chocolate, Jacobs coffee, Nabisco and Oreo cookies, LU, Trident gums and Tang powdered beverages.
Mondelez International earnings
Despite doing well in Brazil and Russia, Mondelez International reported lower than expected earnings for 4Q12. Earnings stood at $534 million or 30 cents per share, down from $830 million or 47 cents a share in the same quarter last year. Analysts were expecting earnings per share of 36 cents. Revenues were down 1.9% to $9.50 billion; analysts had expected revenues of $9.69 billion. Operating profit grew 16.5% to $1 billion while organic net revenues were up 4.4%.
Net revenues were down 2.2% to $35 billion for the year and organic net revenues were up 4.4%. Operating income grew 4% to $3.6 billion.
Developing markets
In developing markets, net revenues increased 2.7% while organic net revenues were up 7.6%. Asia Pacific and South America saw huge growth, whereas Brazil and Russia improved slightly. Power brands were up 12.7%. Segment operating income grew by 7.1%.
Europe
More focus on increasing productivity and overhead reduction were the major reasons behind the company’s solid performance in Europe. Net revenues decreased by 7.1%. Organic revenues were up 0.1% as a result of strong growth in coffee & biscuits brands, and more focus on increasing productivity and overhead reduction. Power brands grew by 3%. Segment operating income was up 19.8%.
North America
Strong growth in cookies fueled healthy performance in the North American region. Net revenues were down 1.7% while the organic net revenues grew by 2.2% amid high pricing. Power brands grew by 5.5%. Segment operating income was down 2.6%.
Valuation
Mondelez International is trading at a forward PE (1yr) of 15.27x and has a dividend yield of 1.90%. It has a strong PEG of 1.28 and a PEGY of 1.11. Using industry forward PE of 18.2x, I would value Mondelez International.
Using consensus estimates, Mondelez International’s value comes out to be $32.21, depicting an upside potential of almost 19%. Therefore, it’s one of the top buys in its industry at this moment.
Major industry players
Headquartered in Michigan, The Kellogg Company (NYSE: K) is trading at a forward PE (1yr) of 14.47x and has a dividend yield of 2.90%. It has a PEG of 2.19 and a growth rate of 10.2%. Incorporating its dividend yield into its PEG gives us a PEGY of 1.71. A mean target price of $60.35 on the sell side shows that The Kellogg Company is trading at its fair value. Plus, a mean recommendation of 2.9 on the sell side reiterates that it isn’t as attractive as Mondelez International. As a result, I remain neutral on The Kellogg Company.
On the other hand, ConAgra Foods Inc. (NYSE: CAG) is trading at a forward PE (1yr) of 13.85x and is yielding a dividend of 3%. It has a healthy PEG of 1.78 and a PEGY of 1.42. A mean recommendation of 2.1 on the sell side indicates that ConAgra is one of the most attractive buys in the food industry. Using earnings multiple, I value ConAgra Foods at $32.21; hence, it’s undervalued by almost 19%. Adding its dividend yield into this gives us a total return of 22%. This makes ConAgra Foods a must buy.
Conclusion
The separation problems in Canada and large spending on advertising in the developing markets were the core reasons behind Mondelez missing its estimates for 4Q12. Investments in the developing markets have gradually started to pay off as organic revenues for the region were up 7.6% in the fourth quarter. In order to market its products, the company has plans of investing even more in its ad campaigns in developing markets. As taxes are expected to decrease by almost 5%, the company expects more earnings in the coming year. The company has raised its earnings estimate range for 2013 to $1.52 to $1.57 per share. Revenues are expected to grow at 5%.
The bottom line is that Mondelez International looks to be in a great shape for 2013. Once again, the biggest catalyst for the company would be the emerging markets where it is expected to outperform its rivals. With an upside potential of 19%, Mondelez International is one of the best buys in the food industry.
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