Sweet Snacks and Shares Worth Savoring

From our vantage point, patient, long-term investors would be wise to consider building a position in

As a leading player in the worldwide snacks arena, Mondelez's portfolio includes several well-known brands, nine of which produce annual sales in excess of $1 billion, including Oreo, Cadbury, Nabisco, Trident, and Tang. In the global confectionery space, it holds 15% share of the chocolate market, 30% of the gum category, and 7% of the candy aisle. In addition, Mondelez holds dominant share of the biscuit category--controlling 18% of the market, far in excess of

Our Fair Value Estimate Is $45 per Share We recently bumped up our fair value estimate for Mondelez to $45 per share from $42, which implies fiscal 2016 price/adjusted earnings of 22 times. Our revised valuation reflects additional cash generated since our last update, as well as a more pronounced improvement in near-term operating margins from efforts to improve the efficiency of its supply chain and manufacturing network. As such, we now forecast operating margins of nearly 15% in fiscal 2016 (up from 14.2% previously) and 15.6% in fiscal 2017 (100 basis points above our prior outlook). Despite this, we are holding the line on our long-term forecast for operating margins just north of 16% by fiscal 2024, which is in line with other efficiently run global packaged food firms. Its prospects for margin improvement are supported by the fact that the majority of its production lines haven't been updated in more than 60 years, signaling the degree of cost savings that could be in the cards. Further, we still believe Mondelez will benefit from new products, as well as its developing-markets platform, and we forecast annual sales growth north of 4% longer-term.

Obstacles Are Present but Not Insurmountable Foreign exchange will take a bite out of sales and profits this year (12% and $0.33 per share, respectively), but we don't believe this is reflective of the firm's underlying business fundamentals, and we anticipate that foreign currencies will ebb and flow over time. The firm has referenced the pushback its received from retailers (particularly those in France) surrounding recent pricing actions, and as such, it intends to rationalize its product set and distribution to focus on the highest-return opportunities (which will likely negatively affect sales growth by 100 basis points this year). We view these efforts as prudent given the competitive environment in which it plays.

Further, we think Mondelez possesses the ability to leverage its global scale to realize margin improvement (particularly given that its operating margins lag the midteen levels generated by its packaged food peers). We anticipate that a portion of any savings generated will be reinvested in the business (in the form of both marketing support and research and development).

Mondelez has experienced obstacles such as self-inflicted mis-steps in Brazil, Russia, and Canada, and persistent challenges in the firm's developed-market gum business since becoming an independent organization more than two years ago. For instance, China (a $1.1 billion business, representing 3%-4% of total sales), had fallen victim to weak biscuit performance and retailer destocking (tensions that are now starting to abate). Beyond sluggish sales (which on a consolidated basis failed to reach its initial 5%-7% long-term target that has since been revised to just target growth in excess of the market), activist investor Nelson Peltz has become more vocal regarding the firm's lagging profitability. As such, management is working to cut excess fat from the organization, which we believe will prop up profits longer-term.

Management's penchant for reshuffling assets to create value is also undeniable, though. Last year, Mondelez announced intentions to combine its coffee brands--like Jacobs and Tassimo, among others--with D.E. Master Blenders 1753 to create a leading coffee player. We believe this will enable Mondelez to focus its resources on the attractive global snack category, which will account for around 85% of its business after the coffee divestiture. However, we wouldn't be surprised to see Mondelez look to part ways with other areas in its European grocery operations, such as cheese, given the tough competitive landscape.

Following the acquisition of Cadbury, the combined firm leapfrogged Mars/Wrigley as the leading player in the higher-growth, higher-margin global confectionery industry. Over the past several quarters, management has noted the dislocation resulting from price increases it has taken to offset input cost pressures, particularly in European chocolate, and the delayed competitive response. With low private-label penetration (private-label competition is minimal in the confectionery market, at just 5% of the overall industry versus the approximate 20% share private-label offerings maintain within the total food and beverage landscape) and strong brand loyalty, confectionery tends to be a category where pricing hasn't prompted volume shortfalls over multiple quarters, as is occurring presently. We don't see this as a structural change, though, but as an indication of the competitive landscape, and we anticipate that Mondelez will drive more balanced sales growth long-term. We forecast for returns on invested capital, excluding goodwill, in the midteens, which supports our stance that Mondelez has earned a wide economic moat.

Management's Interests Align With Shareholders'

Before the split of its operations into its North American grocery and global snacks business, we perceived Kraft's stewardship of shareholder capital to be Standard. As an independent organization, we think Mondelez is continuing down the path of optimizing shareholder returns. Chairwoman and CEO Irene Rosenfeld, 61, has spent more than 25 years at the packaged food firm, after accounting for a two-year stint at

In fiscal 2014, Rosenfeld's salary, stock, and option awards amounted to $12 million--which is commensurate with fiscal 2013 but down from $19.5 million in 2012, which included a stock grant of more than $15 million. Overall, we like several areas of the firm's corporate governance. Directors are elected annually, and the firm's compensation structure appears reasonable, with nearly 80% of an executive manager's annual pay at risk. We're also encouraged that a large group of managers are required to hold a multiple of their annual salary in stock (ranging from four to eight times), as this aligns management's interests with those of shareholders, in our view. The board consists of 13 directors, 12 of whom are independent. However, we think the positions of chairman and CEO should be held by two individuals to better balance decision-making power within the board.