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Mondelez Raised to Buy on Innovation, Cost-Saving Initiatives

On Jan 11, we upgraded Mondelez International, Inc. MDLZ by a notch to a Zacks Rank #2 (Buy). Going by the Zacks model, companies with a Zacks Rank #2 have chances of outperforming the broader market in the next two to three months.

It goes without saying that major food companies are having a tough time due to the shift in consumer preference toward natural and organic food. The industry woes have also been hurting Mondelez’s stock price performance for quite some time now, gaining only 3.3% in the past three months compared with 4.3% of its industry. Nonetheless, we are encouraged by the company’s focus on innovation and brand building, cost savings and productivity gains.

Also, upward estimate revisions further optimism regarding the stock’s prospects. Earnings estimates for 2018 moved up 0.4% over the past 30 days. This signifies that analysts are optimistic about this stock’s near-term performance. Earnings are expected to increase 10.3% and 11.1% in 2017 and 2018, respectively.


Growth Initiatives

Product innovation is an important part of Mondelez’s growth strategy, given the changing consumer preferences. The company regularly refreshes its brand portfolio through innovation and reaches its brands to new geographies and platforms. Recently, the company teamed up with the third-largest cereal company in the United States, Post Consumer Brands, to create two cookie-inspired breakfast cereals.  

Mondelez plans to offer more good-for-you snacks and expects 50% of its product portfolio to comprise “well-being” items by 2020, instead of the current one-third. Apart from simplifying the ingredients and improving nutritional benefits of the existing products, the company will continue to develop products to meet the growing consumer demand for healthier and natural items.

It is also improving its presence in high-growth channels like e-commerce, discounters, convenience stores and traditional trade.  Mondelez inked an e-commerce partnership with China’s leading online and mobile commerce company, Alibaba Group. It expects to generate $1 billion in annual revenues by 2020 from the e-commerce platform. Notably, e-commerce net revenues were up more than 70% in the first nine months of 2017.

Mondelez has been focusing on driving margins through cost savings and productivity improvement. In February 2014, the company announced a $3.5-billion restructuring plan (2014-2018 Restructuring Program) which is expected to generate annualized savings of at least $1.5 billion by the end of 2018. Savings from the program are being used to fund marketing investments and expand capacity to boost the top line and market share. The company is also working to drive advertising cost efficiencies by consolidating media providers, reducing non-working media costs and shifting spending to lower-cost digital media outlets.

The company also focuses on expanding its business through acquisitions. Major buyouts include LU biscuit, Cadbury and certain intangibles from Burton's Biscuit Company. Mondelez plans to make other acquisitions, mainly in developing countries.

Mondelez has been regularly divesting non-core underperforming businesses in order to streamline its operations. In April 2017, the company completed the sale of several manufacturing facilities in France and the license of several local confectionery brands.

In July 2017, the company completed the divestiture of a major part of its grocery business in Australia and New Zealand to Bega Cheese Limited. These deals are expected to increase the Power Brand mix, improve growth rate and expand margins.

Bottom Line

Though challenging industry conditions hurt to some extent, we expect Mondelez’s focus on innovation, brand building, cost savings and productivity improvement along with acquisitions and divestitures to work in favor of the company.

Other Key Picks

Other top-ranked stocks in the same industry include Ingredion Incorporated INGR, Nomad Foods Limited NOMD and Sysco Corporation SYY. All the three companies carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Ingredion is likely to see a 9.2% increase in 2018 earnings.

Nomad Foods is expected to see an 18.1% rise in 2018 earnings.

Sysco’s fiscal 2018 earnings are expected to grow 13.3%.

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