Mondelez Stock: Great Company But Overvalued (NASDAQ:MDLZ)

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Investment thesis

In view of the results of recent years and in particular those of the first half of 2022, Mondelez (NASDAQ:MDLZ) is a very strong company that manages to improve even when the economy is struggling. It’s among the best companies in its sector, with profit margins well above the average. However, despite this good premise, I wouldn’t buy this company right now because $60 per share is too much compared to the fair value of $42. So my sell rating is not due to a problem with the company, but simply because of the current price per share. Mondelez is a big company and I would like to invest in it, but not at this price.

Increasing profitability over the last 10 years

Mondelez is one of the leading American companies in the sale of confectionery, food, snacks and beverage products, thanks to its world-renowned brands. The main brands are Oreo, Tuc, Philadelphia, Ritz and Milka.

Over the past decade, the company’s revenues have declined but profit margins have increased, resulting in improved profitability. The internal efficiency of this company improves and its market power allows it to increase the price of its products without necessarily leading to a significant drop in its income.

Mondelez income statement

TIKR Terminal

As can be seen in this chart, 2012 revenue was approximately $5 billion higher than LTM revenue; thus, at first glance, one might think that there has been an aggravation. However, looking at the interim income statement margins in more detail, we can see that operating income has never been higher. Profitability over the past 10 years has improved, mainly due to a reduction in operating costs.

Mondelez operating costs

TIKR Terminal

Selling general and administrative expenses increased by approximately $2.50 billion in 2012. However, only a small portion of the reduction in these costs was attributed to reduced sales and marketing costs; in fact, this segment suffered a reduction of only $251 million. I consider this to be positive, as the company has reduced operating costs without necessarily affecting advertising costs too much. In addition, in addition to the reduction in operating costs, it is also worth mentioning the reduction in interest costs on debt: in 2012, interest costs increased by $830 million.

In 2012 the operating margin was 11.80%, it is currently 16.50%, a fairly significant improvement for a defensive company like Mondelez. Considering that the industry median is 8.57%, this gives an even more accurate idea of ​​this company’s market power. It’s hard to find a more profitable company than Mondelez in this industry.

A fairly positive 2022 so far

The problems of the current macroeconomic scenario affect all companies; however, some experience these difficulties less. Mondelez, thanks to its efficiency and the stability of its core business, is undoubtedly one of the companies that suffer the least; in fact, its profitability has even improved compared to last year.

Mondelez organic net sales growth

MDLZ Q2 2022

Mondelez’s organic revenue growth has been remarkable over the past two quarters, and in the second quarter it even hit double digits. This growth is directly influenced by two aspects:

  • Growth in business volumes: consumers are buying more and more Mondelez products.
  • The rise in prices of individual products: in Q1 it was 4.80% and in Q2 it was 8%. This increase was larger than other years because the company wanted to impose increased operating costs on consumers due to inflation at 40-year highs.

In light of this data, it is interesting to note how Mondelez manages to achieve ever-higher sales volumes despite rising prices, especially since its products are not essential for a balanced diet. I guess the growing obesity trend is benefiting Mondelez’s coffers, as the daily consumption of extremely sugary products is becoming more and more common. Suffice it to say that since 1975 the global obesity rate has almost tripled, especially among young people. Although the negative consequences of obesity are now well known, excessive sugar consumption leads to a form of addiction from which it is difficult to break free.

Looking at Mondelez sales by region, it would appear that this upward trend is affecting emerging markets the most, as developed markets already have a serious obesity problem, particularly the United States.

Mondelez sales by region

MDLZ Q2 2022

Organic revenue growth in emerging markets was 19.40% in the first half of 2022, compared to just 6% in developed markets. The rise in prices due to high inflation in emerging countries certainly had a strong influence on the net result (especially in Argentina), however, the strong increase in volumes should not be underestimated either. Looking ahead, I expect emerging markets to bring the greatest revenue benefit to Mondelez.

Finally, wanting to delve deeper into the subject of revenues, it is also good to clarify where they come from and how the different segments have reacted in the first half of 2022.

Mondelize 3 main segments

MDLZ Q2 2022

  • The biscuit segment achieved revenue growth of 8.50% in the first half of 2022. This is good growth, although almost entirely driven by rising price levels. Given that this segment is responsible for 47% of total revenue, it would be great if more work was done on volume growth.
  • The chocolate segment is the one that surprised me the most, because despite weighing 32% of total revenues, it has experienced remarkable growth, especially in the last quarter. In particular, unlike the biscuits segment, this was strongly driven by volume growth.
  • The gum and candy segment weighs only 10% of revenue, but it has experienced sensational growth. Among the three segments, it is certainly the most volatile, indeed we can see that in 2020, for example, it experienced a sharp drop of 17.6%. In any case, the figures for the first half of 2022 are excellent and may mean that sales in this segment could have a greater impact on total revenues in the future.

To conclude the discussion on Q2 2022, it should be noted that the company has taken into account revenue growth at constant exchange rates. Also for Mondelez, the strengthening of the dollar against other major currencies had a negative impact on revenues related to exported products.

Consequences of the strengthening of the dollar

With the exception of the rouble, the only currency that has not devalued against the US dollar is the Brazilian real: in all other cases, the super dollar has negatively affected revenues from exported products.

How much is Mondelez worth?

Overall, the first part of 2022 from Mondelez wasn’t bad at all, but that’s not enough to warrant a purchase. Personally, I always have to build a discounted cash flow first when considering buying a business, because any investment is the present value of future cash flows. The model I built is composed of the following data:

  • The cost of equity is 7% and assumes a beta of 0.61, a country market risk premium of 4.20%, a risk-free rate of 3.50% and additional risks of 1%. The after-tax cost of debt is 3.74%.
  • The capital structure is 75% equity and 25% debt, with a resulting WACC of 6.25%.
  • The growth rate entered is 2%. I intentionally entered a low growth rate since Mondelez is a defensive company with fairly predictable free cash flow. As a value company in a slow growing industry, I think 2% is appropriate.
  • Net debt and outstanding shares are derived from TIKR Terminal.

Mondelez Discounted cash flow

Sources already cited

According to my assumptions, Mondelez is currently overvalued as it has a fair value of $42.74 while it is currently trading at $60.73. This is one of those situations where the company under consideration is excellent but at the same time too expensive. My sell rating has nothing to do with the core business of the company, but is simply related to being priced too high. Admittedly, one must consider that when buying such a large company there may be an additional premium to pay, but in any case, I would wait at least the $50 per share before opening a position . I don’t completely disagree with those opening a job now since I enjoy this company; however, I believe it can be purchased at a lower price in the future.

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