Mondelez: The Market Is Acting Surprised When It Shouldn’t (NASDAQ:MDLZ)

It is quite uncommon for a large cap consumer staple business to outperform the heavily tech-weighted S&P 500 index during a period of excess liquidity when growth stocks tend to do much better than value.

But that’s exactly what happened to Mondelez (NASDAQ:MDLZ) over the past few years. Since November of 2020, MDLZ had a total return of nearly 35%, thus outperforming both the Consumer Staples Select Sector SPDR® Fund ETF (XLP) and the S&P 500 on a risk-adjusted basis.

This performance is hardly a coincidence and proves that properly nurturing global brands in the FMCG space could lead to significant value gains for shareholders. This was part of my initial investment thesis on Mondelez back in 2020 and the stock has also recently made it into my short-listed high conviction ideas.

Overall, the market seems to be slowly catching up to the reality that Mondelez deserves a more premium valuation and as the company reported its third quarter results for 2023 earlier this week, this process is likely to accelerated.

Both top and bottom line figures came above consensus estimates and with that MDLZ management has raised its full fiscal year guidance.

We now expect top line growth of 14% to 15% versus our original outlook of 5% to 7% and most recent outlook of 12% plus. EPS growth is also expected to be approximately 16% versus our prior outlook of 12% plus and original outlook of high single-digit.

Source: Mondelez Q3 2023 Earnings Transcript

The guidance upgrade was hardly a one-off event and has been a recurring theme on each of Mondelez quarterly earnings in 2023.

All that comes as a result of Mondelez long-term strategy to focus on core assets and expand into adjacent product categories. But the key factor behind the strong business momentum has been the company’s strong exposure to Emerging Markets and its focus on brand-building activities.

Pricing Power Matters

Having a strong brand portfolio is a must-have for a large FMCG business, but operating in the right product areas and having a true global exposure is what sets Mondelez apart from most of its peers.

This competitive advantage became apparent in recent years as inflation accelerated and margins in the sector came under pressure. As a starting point, the snacking segment of Packaged Food is a high margin area that is also characterized with very strong customer loyalty. That is why I think Mondelez products did not suffer from low priced private label alternatives.

We continue to see evidence that consumer demand for our snacking categories remains resilient and that consumers continue to prefer our widely loved brands over private label alternatives.

Source: Mondelez Q3 2023 Earnings Transcript

This allowed the company to introduce significant price increases across its portfolio without suffering heavy volume losses. Even better, MDLZ reported volume gains in 2022 and so far in 2023 even as price increases has a double-digit impact on organic net revenue growth.

Once we split the impact of pricing between Emerging and Developed markets, the competitive advantage that Mondelez has to its more local peers becomes obvious. The pricing impact in Emerging Markets has been nearly twice as high as it was in Developed markets, while at the same time volume gains in the former region were also significant.

The graph above clearly illustrates the strong competitive advantage of having a strong presence in Emerging Markets through both well-known global brands and well-established local ones. Even though the strong U.S. dollar is still a headwind, the gap with Developed Market is significant.

In emerging markets, consumer confidence remains strong. We continue to see resilient underlying demand and lower price sensitivity than in developed markets. During Q3, we delivered strong growth in terms of both volume and value at 4% and 24%, respectively.

Source: Mondelez Q3 2023 Earnings Transcript

In contrast, the large North American market, for example, is experiencing far lower topline growth and consumers are less willing to accept significant price increases.

If I start with North America, there we are up 4.6% in year-to-date, 3% in volume/mix. The categories are experiencing a little bit of softness there.

Source: Mondelez Q3 2023 Earnings Transcript

That is why, if we compare Mondelez to one of its major peers – The Hershey Company (HSY), for example, we could see that sales of the latter are predominantly in North America as opposed to MDLZ strong presence around the globe.

Although Europe is included within the Mondelez international segment above, nearly a third of the company’s sales are made in Africa, Middle East & Asia and Latin America Regions.

As a result of this difference in geographical exposure, Mondelez’s share price performance has detached from the one of Hershey. In just one year, the gap between the two is now as wide as 30%.

Are We In Overbought Territory?

Even though commodity prices remain elevated and the tailwind from higher selling prices will be lower in FY 2024, Mondelez operating margin improvements so far are significant.

Fiscal year 2023 is on track for a major improvement in operating profitability from the 2022 lows and is given the optimistic guidance we saw above could reach levels last seen in 2021.

The reason why this matters so much is that at present the MDLZ share price does not assume further improvements in operating margins. As we see in the graph below, MDLZ Price-to-Sales multiple is in-line with the margin over the past 12-month period and even lies below the trend-line.

Given the strong momentum in pricing we saw above, the probability of further margin improvements going forward is significant which could result in an upward multiple repricing opportunity for MDLZ on top of the high top and bottom line growth.

Mondelez is also in a very good spot from a capital allocation point of view. Given the company’s low leverage, the management will be able to prioritize higher reinvestments into the business as well as strategic M&A opportunities and further dividend increases.

(…) our priorities remain the same in terms of reinvesting in the business and in selected strategically and financially attractive bolt-on M&As as well as strong dividend growth.

Source: Mondelez Q3 2023 Earnings Transcript

So far, MDLZ management has proven its ability to go after the right acquisition targets that expand its presence in highly attractive Emerging Markets as well as adjacent product categories, where the company’s iconic brands could provide significant leverage. As I previously stated:

The reason why the strategy of expanding more aggressively into the adjacent product categories shown above is that many of Mondelez iconic brands could be used to improve customer loyalty within these areas. For example, MDLZ could use its Milka, Toblerone or Cadbury chocolate brands within cakes & pastries, snack bars, ice cream and even yogurt product categories as a mean to drive more customer choice.

In terms of dividends, MDLZ yield is now at multi-year highs and given the management’s commitment to further increases the stock could become an attractive dividend growth opportunity.

Conclusion

Mondelez third quarter results were yet another confirmation that the company’s strategy is working and that having a strong global brand portfolio with significant exposure to Emerging Markets is a major competitive advantage over other large cap peers. Given the initial market reaction and MDLZ current valuation multiples, it appears that the market was caught off-guard. Even though MDLZ has been among the best performers in the sector, I expect the stock to continue to deliver superior shareholder returns.