MDLZ: Lower Cocoa Costs And Supply Chain Upgrades Will Drive Efficiency

Key Takeaways

• Mondelez's global pricing strategy and strategic growth agenda aim to increase revenue and market share, especially in Europe and emerging markets.
  
• Innovative brand activations and sustainability initiatives are expected to enhance consumer engagement, brand loyalty, and long-term value creation.
  
• Elevated cocoa costs and decreased consumer demand are pressuring profit margins, with potential risks from economic uncertainties and trade tensions impacting future revenues.

Catalysts

Through its subsidiaries, manufactures, markets, and sells snack food and beverage products in the Latin America, North America, Asia, the Middle East, Africa, and Europe.

• Mondelez International is executing a robust pricing strategy in response to high cocoa costs, which is expected to improve revenue as pricing takes effect globally, especially in markets like Europe and emerging markets.
  
• The company is implementing a strategic growth agenda that includes reinvesting in brands, expanding distribution, and strengthening market presence, which should positively impact revenue growth and market share.
  
• Mondelez’s focus on innovative brand activations and product collaborations, like the Oreo and Post Malone partnership and Cadbury Dairy Milk with Lotus Bakeries, are expected to enhance consumer engagement and drive revenue growth.
  
• The ongoing investment in sustainability initiatives, such as scaling the Cocoa Life program and reducing carbon emissions, is likely to support long-term value creation and enhance brand loyalty, potentially improving net margins.
  
• Mondelez continues to expand its presence in emerging markets, adding over 100,000 stores, which is expected to drive growth in market share and revenue as consumer confidence stabilizes and economic conditions improve in these regions.

Mondelez International Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Mondelez International's revenue will grow by 2.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.9% today to 11.0% in 3 years time.
• Analysts expect earnings to reach $4.7 billion (and earnings per share of $3.9) by about July 2029, up from $3.5 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $3.7 billion.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 21.9x on those 2029 earnings, down from 23.7x today. This future PE is greater than the current PE for the US Food industry at 17.8x.
• Analysts expect the number of shares outstanding to decline by 1.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.11%, as per the Simply Wall St company report.

Risks

• Elevated cocoa costs significantly impacted adjusted gross profit and consequently affected EPS, posing a risk to net margins if prices remain high or increase further.
  
• North America experienced a decline due to retailer destocking and softer consumer demand, particularly from lower-income households, which could continue to pressure earnings and margins.
  
• Volume/mix was down 3.5% due to elasticity, with potential future risks if consumers continue to react negatively to higher prices, leading to revenue challenges.
  
• Consumer confidence in key markets like Brazil, Mexico, and China is soft due to economic uncertainty, which could impact demand and subsequently revenue and earnings growth.
  
• Increasing trade tensions and potential tariff impacts, although manageable now, could create future expense pressures or require strategic adjustments, affecting net profits.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $68.86 for Mondelez International based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $75.0, and the most bearish reporting a price target of just $55.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $43.1 billion, earnings will come to $4.7 billion, and it would be trading on a PE ratio of 21.9x, assuming you use a discount rate of 7.1%.
• Given the current share price of $64.99, the analyst price target of $68.86 is 5.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.