Snacks continue to be a source of comfort as well as excitement and variety for consumers
Nasdaq-listed Mondeléz International is a global F&B company and one of the world’s largest snack companies. The company’s core business is making and selling chocolate, biscuits and baked snacks. Its other businesses include gum & candy, cheese & grocery and powdered beverages. Mondeléz’s portfolio includes popular brands such as Oreo, Ritz, Cadbury Dairy Milk and Toblerone. Mondeléz currently trades at US$73.19 ($98.33) per share, giving it a market cap of US$99 billion.
We have chosen Mondeléz for our portfolio because it is a well-established, stable business in an industry that is unlikely to see much volatility in its business and share price growth. The company’s three-year daily adjusted beta against the S&P 500 is a mere 0.67, affirming its share price is much less volatile than the market. Although this does not mean that the company is fairly valued, we think it is still undervalued and has value growth to offer, albeit slower and steadier. As such, this stock would be preferable for investors seeking the least amount of risk in active equity markets like the US. The consistency of the company’s performance, coupled with decent tailwinds, could offer investors a fairly decent return in exchange for taking on minimum risk. Chart 1 illustrates the company’s total shareholder returns compared to peers, where it consistently outperformed due to its strong business fundamentals and results, so investors should not view this stock merely as a safe asset to balance out overall portfolio risk and expect minimal returns.
The business strategy of Mondeléz is centred around being the global leader in snacking. The company’s current focus prioritises its fast-growing core categories of chocolate, biscuits and baked snacks. Over the longer term, the company aims to accelerate its consumer-centric growth by quickly testing, learning and scaling new product offerings to meet diverse and evolving local and global snacking demand trends. Mondeléz also aims to leverage M&A, particularly for growth, focusing on the chocolate and biscuits products segment. In 2012, its core categories of chocolate, biscuits and baked snacks constituted only 60% of the company’s net revenue but 10 years later, this has increased to 80%. The company’s longerterm goal is to achieve 90% in its core categories. The shift towards higher-growth core categories could amplify the earnings and margins generated for the company over the medium to longer term.
Mondelez’s strong international exposure aids in achieving its goal of increasing its global footprint in the snacking space. Despite concerns over economic growth and geopolitical tensions, the company’s business prospects over the longer term seem bright as it shifts towards higher-demand and higher-growth core products. Given its well-known brand names and the inelasticity that comes with it, the company would be able to increase its prices selectively and strategically to avoid the erosion of its margins, which could be due to increasing labour and ingredient costs. Diving deeper into the elasticity of its products, snack food consumption is highly correlated to GDP growth, urbanisation of populations and rising discretionary income levels associated with a growing middle class, particularly in emerging markets. Snacks should continue to be a source of comfort, excitement, and variety for consumers, as identified by the company, and capitalising on higher-growth snacks which are more in demand is a step in the right direction for the company to address this relationship.
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Mondeléz’s financials have been mostly stable and consistent, including its net income and cash flows over the past 10 years, as shown in Chart 2. Chart 3 shows the company’s operating and free cash flow margins over the past five years, which reflect stable and consistent figures. In terms of financial safety, although the company has a net debt-to-equity ratio of 65%, its interest coverage ratio of 10 times is more than enough for investors not to be concerned about the solvency of the company.
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The company has 27 “buy” calls, three “hold” calls and no “sell” calls, with an average target price of around 15% above its current trading price. Based on our in-house valuations, we believe that the company’s intrinsic value is also around 15% above its current trading price. Mondeléz is suitable for investors leaning on the less-risky spectrum of stocks that have stable growth.
Disclaimer: This is a virtual portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy or sell stocks, including the stocks mentioned herein. This portfolio does not take into account the investor’s financial situation, investment objectives, investment horizon, risk profile, risk tolerance and preferences. Any personal investments should be done at the investor’s own discretion and/ or after consulting licensed investment professionals, at their own risk.
