Mondelez's Sales Improve in H1: Can it Maintain the Trend?

On Aug 17, 2015, we issued an updated research report on Mondelez International, Inc. MDLZ.

On Jul 30, Mondelez announced strong second-quarter 2015 results driven by higher marketing support and record supply chain productivity gains.

The snacks giant kept the first-quarter momentum going in the second by surpassing the Zacks Consensus Estimate for both earnings and sales. Earnings of 47 cents per share increased 17.5% year over year on the back of improved organic revenues and solid margins. Organic revenues increased 4.3% driven by higher pricing and strong growth in developing markets and the Power Brands.

Moreover, the Zacks Rank #2 (Buy) company raised the 2015 organic sales guidance in response to better-than-expected top line in the first half resulting from marketing support funded by cost savings from the restructuring plan.

Mondelez’s $3.5 billion restructuring plan, announced in March last year, has already started yielding positive results and played a pivotal role in driving sales and operating profits in the past two quarters. The program is accelerating supply chain cost savings and lowering overhead costs through layoffs, asset disposals and implementation of a zero-based budgeting system (ZBB). Savings from the program are being used to fund marketing investments and capacity expansion to accelerate top-line growth and gain market share.

Further, the company increased the share buyback program by $6 billion supported by cash proceeds from the divesture of its coffee business in July.

However, though margins have remained consistently strong, Mondelez’s volumes have been declining since 2014 due to volume erosion caused by significant pricing actions and category weakness due to lower demand. The company’s key category — snacks — has slowed down due to soft global retail and consumer demand.

Mondelez, like many other U.S. food producers — General Mills, Inc. GIS, Campbell Soup Company CPB and The Kraft Heinz Company KHC — has struggled due to shifting consumer preference toward natural and organic ingredients over packaged and processed food. Moreover, with 80% of its sales coming from the international markets, currency is a sizeable top-line headwind.

However, its sales trends improved in the first half and management expects better top line in some key markets, like North America, Europe and India, in the second half as the price gaps narrow, and volumes and market share improve with increased advertising support. Advertising and consumer spending is expected to continue to rise in the second half as the company invests in product launches and marketing programs.

In North America, sales trends are expected to pick up in the second half on the back of greater advertising support and gains from capacity additions. Management is increasing investments in in-store execution and advertising to support the Power Brands and innovation in the country.

In India and Europe, the company witnessed volume erosion in the first half due to price increases in chocolate. However, management expects category and revenue growth to improve in these regions backed by higher advertising investments and as consumers adapt to higher prices.

Mondelez’s shares have had a good run so far this year, gaining more than 26%. Over the past month, analysts have become increasingly bullish on the company, with 9 out of 12 upward estimate revisions for 2015 earnings.

Also, earlier this month, activist investor William Ackman’s hedge fund company, Pershing Square Capital Management LP, revealed a 7.5% equity stake in Mondelez — clearly indicating increasing investor attention toward this stock.

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