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Stock Analyst Update

Decent but Inflated Sales, Profit Gains for Mondelez

The firm looks undervalued today, and we think investors should stock up.

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While margin gains have taken center stage over the past several quarters, the highlight from  Mondelez’s (MDLZ) first-quarter results was the acceleration in reported sales, up mid-single digits. However, this result was inflated by favorable foreign currency and the Easter shift; when both are excluded, organic sales ticked up a more modest (albeit respectable) 2% pace, driven by higher prices, favorable mix, and increased volumes. The bulk of this growth reflected strength in Europe (up 4.7%) and emerging markets (up 5.5%), each of which contributes around 40% to total sales. But North America (about one fourth of its consolidated total) remains a laggard (down 1.8% on an underlying basis), which management attributed to retailer inventory destocking as well as weakness in gum (a category that has languished for the better part of the last decade).

Further, higher raw material and transportation costs ate into margins (particularly on its home turf), but these pressures were offset by its efforts to drive efficiencies across the organization, as adjusted gross margins contracted 110 basis points to 39.4% but adjusted operating margins ticked up 20 basis points to 16.7%. We aren’t blind to the competitive and inflationary headwinds plaguing firms across the consumer products landscape, though, we posit Mondelez will weather these challenges with its portfolio of leading brands, entrenched retail relationships, and expansive global scale (which underlie our wide moat).

Results aligned with our expectations, and management held the line on its full-year outlook (low-single-digit organic sales growth and adjusted operating margins around 17%). As such, we don’t intend to alter our $51 fair value estimate or long-term forecast (4% annual sales growth and 20% operating margins, an increase of 400 basis points by fiscal 2027). Shares trade at more than a 20% discount to our valuation, and we think investors looking to feast on the packaged food landscape should stock up.

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Erin Lash does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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