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Mondelez: A Sweet Opportunity in Global Snack Foods

Opdateret: for 7 dage siden


Warren Buffett has stated that everyone should invest within their circle of competence. Most people enjoy snacks, whether they are sweet or savory, so it is common for snacks to fall within their area of expertise. But not all companies in the industry are created equal. Mondelez has delivered nearly twice the total shareholder return compared to its peers over the past five years. The question is whether Mondelez is worth investing in. It is what I am going to investigate in this analysis.


This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.


Since attending the workshop with Phil Town, I have decided to make some changes to the layout of my analyses. I will perform additional calculations and also provide a brief explanation of why the company is significant to me. If you want to learn more about my company evaluation process, please visit the "MY STRATEGY" section on my website.


For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares in Mondelez. If you would like to see the stocks in my portfolio or copy my portfolio, you can do so on eToro, You can find instructions on how to do this here. I don't own any stocks in competitors of Mondelez either. Thus, I have no personal stake in Mondelez. If you want to purchase shares (or fractional shares) of Mondelez, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on your investment journey with as little as $50.



Mondelez International was founded in Chicago, United States, in 1923. Mondelez International was formerly known as Kraft Foods Inc. The company changed its name to Mondelez International in October 2012 when its grocery business was spun off to a new company called Kraft Foods Group. Mondelez manufactures, markets, and sells snack food and beverage products. It offers a variety of products such as biscuits, baked snacks (cookies, crackers, salted snacks, snack bars, cakes, and pastries), chocolates, gums, candies, cheese, grocery items, and powdered beverages. The company's brand portfolio includes Oreo, Ritz, LU, CLIF Bar, and Tate's Bake Shop biscuits and baked snacks, as well as Cadbury Dairy Milk, Milka, and Toblerone chocolate. Mondelez's largest categories are biscuits and baked snacks, which contributed 49% to revenue in 2023, and chocolate, which contributed 30% to revenue in the same year. Gums and candy contributed 12% to revenue in 2023, followed by cheese and grocery (6%) and beverages (3%). Mondelez's largest market is Europe, which contributes 36% of revenue, followed by North America (31%), AMEA (19%), and Latin America (14%). Mondelez is one of the largest companies in its industry as they hold the largest global market share in biscuits (17,5%), the second-largest global market share in chocolate (12,7%), and the third-largest global market shares in snack bars (9,6%) and cakes and pastries (3,6%). Mondelez has a moat through its brands, such as Oreo, LU, Cadbury Dairy Milk, and Toblerone, which are globally recognized.


The CEO is Dirk Van de Put. He joined Mondelez to become the CEO in 2017. He joined Mondelez from McCain Foods Limited, a privately-held Canadian company that is the largest marketer and manufacturer of frozen french fries, potato specialties, and appetizers. During his six years as CEO of McCain Foods Limited, he increased net sales by more than 50 percent, with over 75 percent of that growth being organic. Additionally, EBITDA experienced double-digit growth each year over the six years. Before joining McCain, he was the President of the Global OTC Division of Novartis Inc., a Swiss pharmaceutical company, and spent over a decade with Groupe Danone. In the first part of his career, he held many sales and marketing roles in Europe and Latin America for Mars Inc., as well as The Coca-Cola Company. Thus, he has vast experience in the industry. He holds a doctorate in veterinary medicine from the University of Ghent, Belgium, and a postgraduate degree in business from the University of Antwerp, Belgium. He is a seasoned global CEO, Throughout his career, Dirk Van de Put has a proven track record of driving top-line and category growth, while simultaneously enhancing cost structures and profitability. Since joining Mondelez, the company has delivered almost twice the total shareholder returns compared to its peers. Dirk Van de Put has an employee rating of 79/100 at Comparably, which positions him in the top 5% of companies of similar size. His proven track record, experience, and high employee rating mean that I am very confident in Dirk Van de Put leading Mondelez moving forward.


I believe that Mondelez has a strong brand moat, and I also appreciate their management. Now, let us analyze the numbers to determine if Mondelez meets our criteria for having a strong competitive advantage. In case you want an explanation about what the numbers represent, you can refer to "MY STRATEGY" on the website.


The first number we will investigate is the return on invested capital, also known as ROIC. We require a 10-year history with all figures exceeding 10% for each year. These numbers are underwhelming. Mondelez has only managed to achieve a Return on Invested Capital (ROIC) above 10% in two years in the past decade. ROIC has been close to 10% every year since 2018, excluding a challenging 2022, but it didn't exceed 10% until 2023. The only positive aspect of Mondelez's ROIC is that they achieved a ROIC above 10% in 2023, and hopefully, this trend will continue in the future. Nonetheless, the Return on Invested Capital (ROIC) has been very underwhelming in the past decade.



The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. The numbers are a bit mixed, as there has been a decrease in equity in four out of the past ten years. On a positive note, Mondelez achieved a record high equity in 2023. It is also worth noting that Mondelez has made numerous acquisitions and divestitures in the past decade, which also affect the numbers.



Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins offer a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is not surprising to see that Mondelez has consistently generated positive free cash flow every year in the past decade. Free cash flow has been relatively stable since 2019, but it is encouraging to see that Mondelez managed to deliver its highest free cash flow in 2023. Mondelez expects free cash flow to be around the same range at 3.500 in 2024. Levered free cash flow has slightly decreased in 2022 and 2023 compared to the four previous years, primarily due to macroeconomic factors. It is encouraging that the levered free cash flow margin increased in 2023 compared to 2022. Free cash flow yield is below the ten-year average, indicating that the shares are trading at a high valuation. However, we will revisit this later in the analysis.



Another important aspect to consider is the level of debt. It is crucial to determine whether a business has manageable debt that can be repaid within a three-year period. We calculate this by dividing the total long-term debt by earnings. After performing the calculation on Mondelez, I found that the company has 3,41 years of earnings in debt. It is slightly above the three-year threshold, but at its lowest level since 2016. The debt won't prevent me from investing in Mondelez, but it is something that needs to be monitored.



Based on my findings so far, I believe that Mondelez is an intriguing company. However, no investment is without risk, and Mondelez also has its fair share of risks. One risk is competition. The food and snacking industry is highly competitive. Mondelez's main competitors are food, snack, and beverage companies that operate on a global, regional, and local scale. In many markets, these competitors also include retailers with their own branded and private label products. Failure to effectively respond to actions, innovations, or other challenges from their competitors could adversely affect Mondelez's business. Some of these competitors have different profit objectives and investment time horizons than Mondelez does. Therefore, they may approach pricing and promotional decisions differently, which could affect the sales of Mondelez products. Furthermore, the rapid growth of some channels, such as discounters and digital commerce, may impact Mondelez's operations, create consumer price deflation, alter consumer buying behavior, or disrupt Mondelez's retail customer relationships. Commodity Prices. Mondelez purchases and utilizes significant amounts of commodities, such as cocoa, dairy, wheat, edible oils, sugar, sweeteners, flavoring agents, and nuts. Costs of raw materials are volatile and fluctuate due to conditions that are difficult to predict. In 2023, cocoa and sugar prices surged to historically high levels. It seems that the prices will not decrease anytime soon because of a global drought affecting cocoa production. This drought is expected to continue due to the weather phenomenon El Niño, which brings hotter and drier than usual conditions to cocoa-producing countries. The weather is also expected to impact the sugar harvest, potentially causing prices to remain high for at least another year. Thus, higher commodity prices may affect Mondelez's performance in the future. A decrease in demand for their products. We are witnessing a growing consumer trend towards health consciousness, fueled by mounting concerns about obesity and other health-related issues. If this trend continues, it could have an impact on sales of Mondelez products in the future. Furthermore, although there is no indication of it currently, it is possible that the government may consider implementing a sugar tax in the future due to the health risks associated with sugar. We have also seen U.S. cities implementing a sugary drink tax, which could potentially be extended to other products. Furthermore, it is uncertain how the introduction of obesity drugs such as GLP-1 will affect Mondelez in the long term.


There are also numerous reasons to invest in Mondelez. One reason is distribution expansion. Mondelez believes that it can achieve substantial numerical distribution in various markets. The company also believes that approximately 50% of Mondelez's organic growth stems from expanding distribution. Management has specifically highlighted China, India, and Brazil as markets with significant potential for distribution expansion, as these countries still offer ample opportunities for growth. Since 2019, Mondelez has added 1,7 million stores in China, India, and Brazil. And their biscuits are now available in approximately 3 million out of the potential 6 million stores in China, while its gum business is only present in 2 million out of the 6 million potential stores. In India, Mondelez has added 180.000 stores in 2023. They deployed 100.000 new VISI coolers, but there are over 9 million retail outlets in India. Currently, Mondelez directly covers 2 million stores and indirectly covers about 3 million more. So, they are in 5 million out of the 9 million stores in India. It means that the years during which they can continue to expand their distribution are quite significant going forward. New innovations. Mondelez is undergoing a change in how they approach new innovations. Previously, Mondelez had many small innovation projects that did not have a significant impact on the business. Now, Mondelez is focused on larger innovation projects that will have an impact on the business. One strategy involves creating healthier versions of their popular products, like introducing gluten-free Oreos or zero-sugar Oreos in China. These products have been successful and will be extended to other brands. Mondelez is also making significant strides in the cakes and pastries market, where they plan to intensify their efforts. They mentioned products such as OREO Cakesters or Oreo Airy Cake in China. Management believes that these are all significant innovations that have the potential to generate tens of millions of dollars in net revenue per country. They are also focused on premium chocolate, as they have launched the Toblerone pralines. Thus, they are focusing on larger innovations that require more effort and have greater potential. Dividends and buybacks. Mondelez may currently have a low dividend yield, but it has grown its dividend at a compounded growth rate of 11,68% over the past ten years. This rate is lower than the free cash flow growth, indicating the potential for them to increase the dividend at a higher rate in the future. It means that Mondelez has increased its dividend at a faster rate than companies like Pepsi, Hershey's, and General Mills, all of which operate in the snacks industry. Mondelez is also buying back shares and has announced that share repurchase expectations are around $2 billion in 2024. Over the past ten years, Mondelez has repurchased approximately 20% of its shares, benefiting investors.



Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.


The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 3,62, which is from the year 2023. I have selected a projected future EPS growth rate of 8%. Finbox expects EPS to grow by 8,8% in the next five years, but I'm more conservative. Additionally, I have selected a projected future P/E ratio of 16, which is double the growth rate. This decision is based on Mondelez's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $30,91. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Mondelez at a price of $15,46 (or lower, obviously) if we use the Margin of Safety price.


The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 4.714, and capital expenditures were 1.112. I attempted to analyze their annual report in order to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 778 in our calculations. The tax provision was 1.511. We have 1.343,984 outstanding shares. Hence, the calculation will be as follows: (4.714 – 778 + 1.511) / 1.343,984 x 10 = $40,53 in Ten Cap price.


The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Mondelez's Free Cash Flow Per Share at $2,65 and a growth rate of 8%, if you want to recoup your investment in 8 years, the Payback Time price is $30,44.


I believe that Mondelez is an interesting company. I really like the management because the CEO has a proven track record, vast experience, and high employee ratings. However, I find the low Return on Invested Capital (ROIC) concerning, as Mondelez has only managed to deliver a ROIC above 10% in two years in the past decade. Mondelez operates in a highly competitive industry, where competition will always pose a risk. However, Mondelez is one of the largest companies in the industry, which demonstrates their historical ability to handle competition effectively. Commodity prices will always pose a risk for Mondelez, as the company is dependent on various commodities, and prices fluctuate year over year due to factors that are beyond Mondelez's control. Hence, there will be years when commodity prices affect Mondelez's results. The growing consumer trend towards health consciousness, government regulations, and obesity drugs will likely impact Mondelez's business in the future, but it is uncertain to what extent. Mondelez still has plenty of potential to expand its distribution, especially in emerging markets, which will lead to growth in the coming years. Furthermore, Mondelez is now focusing on larger innovation projects, which will drive growth for the company in the future. Finally, Mondelez is increasing its dividend at a faster rate than its competitors, indicating that long-term dividend investors stand to benefit from this growth if they maintain their holdings of Mondelez shares. Personally, I don't like the low Return on Invested Capital (ROIC), and I will need to see Mondelez consistently deliver an ROIC above 10% before investing in the company. Hence, I am not investing in Mondelez now.


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