SNACK FOODS ANYONE?

Snack foods by any other name may have a negative ring to them, but like their air people love their snack foods, healthy or not.

Mondelez, the Kraft spin off of a while back is the world's largest snack food company with Pepsi Cola bringing up the rear. We have written about MDLZ before.

With the recent strength in the U.S. dollar MDLZ faces some headwinds beyond just the expected global slowdown. Nor on a P/E basis is the stock particularly cheap.

But on any pullback we intend to add to our positions particularly in our retirement accounts for the long term because we think there will be dividend and principle growth over the long haul. 

We don't want to re-invent the wheel, so here are two of our earlier posts on Cafe Financialspuds along with one not ours on the site Seeking Alpha that does an excellent job of pointing out MDLZ's prospects given one's entry point and one's investment horizon.

That the company's had its trouble cracking a strong foothold in Asia makes the latest news about it 80% partnership with the big Vietnam snack food business a good move

We owned shares of Kraft and we first wrote about MDLZ's prospects before the contemplated spin off. We continue to own shares. As always, however, one should do his or her own homework.

Sunday, March 10, 2013

PLAYING THE BRICS

Looking for a safer way to play the BRIC world?

You might want to look at last year's Kraft spin off, Mondelez, MDLZ. 

As a recent Barron's article notes the stock, trading at $28 and change, is essentially a snack food company. Just a few of its products include Cadbury, Ritz Crackers, Dentyne, Oreo Cookies and Wheat Thins. It has many others like Philadelphia cream cheese and Dentyne.

Buffett can have his cherry coke. Offhand we don't know of a single, solitary interplanetary soul who doesn't enjoy an Oreo and a cold glass of milk?

Right off the bat you need to know we own the stock and have been slowly adding to it since acquiring shares in the spin off last year. 

Understand in our view this is not a trader but one of those God-awful, Warren Buffett-like buy and holders with a small dividend and a lot of growth potential. The current p/e, around 18, is a little high, but isn't that what expected growth is all about?

Take a look at some of its competitors, all growing slower at much higher P/E ratios. And could this be a decent currency play if the dollar tanks?

According to Barron's, with revenue in 2012 of $35 billion, 75% of its sales last year came from three rapid growing snack food categories, chocolate, candy, cookies and crackers.

 As one analyst puts it, snack foods are lucrative with good profit margins and little competition from the ever-worrisome private-label firms that continue to chew away at the margins in the grocery business.

In case you're not aware Pepsi's another snack food business, more so than many realize. Here's a little snack to consider with your Oreos and milk. Of MDLZ's 29 well-known brands, nine generate more than $1 billion in annual sales. And, yes, Oreos is one of them.

Now about those BRIC countries, Brazil, Russia, India, China and South Africa. MDLZ gets about 30% of its annual sales there. When you consider the prospects for annual growth in developing versus developed countries, it's a no-contester.  And remember at least for the nonce snack foods are cheaper and have better profit margins than cars.

A possible unforeseen risk is the food police. We just toss that in so you can't say no one did.

One other quick point. Though we have not heard anything, this is just one of those wild, silly thoughts we get every once in a two-thirds moon while walking the dog, Taylor. 

You want to remember the MAINE. But recall too the HEINZ.

And again in June.

Thursday, June 27, 2013

NELSON PELTZ

Nelson Peltz is a well-known billionaire investor.
Recently, his firm, Trian Fund Management, took a huge position in Mondelez, a company we've written about before. Mondelez (MDLZ),  the big snack food company Peltz was at least partly responsible for getting Kraft to spin off, is as we've noted a decent way to play the BRICS.

But the story gets more intriguing. Pepsi is also a giant in the snack food business, a company Peltz is also quite active in, building his ownership to 12 million shares, according to the latest issue of Fortune. Around the same time Peltz doubled his holdings in MDLZ.

Put these two behemoths together, something many speculate Peltz wants to do, and you're talking huge. You're also talking some money being made. Activist Peltz held more than 5% of Heinz stock when that deal went down at a nice premium.
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Seeking Alpha article.

Summary

• Increasing health awareness, competition, and the current economic situation in the developed world have all played important roles in weakening the company’s top line.
• Mondelez will acquire an 80 percent stake in Kinh Do Corporation's category-leading snack business in Vietnam.
• Vietnam’s industry and demographic trends highly favour Mondelez’s plans for advancement.

Mondelez (NASDAQ:MDLZ), the king of quite a few iconic biscuit and chocolate brands, recently reported its earnings for the third quarter of FY2014. Besides reporting a better than expected bottom line performance, the company has made some turning point announcements that greatly impact its future outlook.

 The company operates its business through five reportable segments that are indicated in the pie chart on the left along with the attribution of each geographical segment to the company's top line. The pie chart on the right indicates the company's revenue distribution as per consumer sector.

Source: Third Quarter Earnings

Latest Quarterly Earnings Overview

During the third quarter of FY2014, the company's revenues have shown a weaker performance primarily for forex reasons, which have hit all the multinational companies. The top line fell approximately 2% YoY to $8.3 billion in the recently ended quarter compared to $8.5 billion reported in the same period last year. Revenues remained relatively flat in Latin America, Asia Pacific, and North America but plunged 6% YoY in EEMEA and by 2% in Europe. Analysts were expecting the top line to hit the $8.38 billion mark.

Note that although the total revenues plunged, the organic aggregate revenues have been positive, especially in the emerging markets. Mondelez's total organic revenues increased approximately 3% YoY with the growth primarily owed to the emerging markets whose sales grew 9% YoY compared to the 1.3% organic revenue decline in the developed markets. However, one point that must be noted is the fact that the organic revenue growth is accredited to the high margin pricing instead of volumetric growth.

The company's bottom line plunged to $899 million compared to $1.01 billion reported in the third quarter of FY2013. In per share terms, earnings were 53 cents per share in the recently ended quarter down approximately 5% YoY. However, the adjusted earnings improved 25% YoY from 40 cents per share last year to 50 cents per share in the recently ended quarter compared with analysts' expectations of 39 cents per share. The per share earnings improvement is largely owed to the company's aggressive share buyback program.

Kinh Do Acquisition

Looking through the various consumer sectors the company operates it is obvious that food companies are facing challenges in the developed markets. Increasing health awareness, competition and economic situations in the developed world have all played important roles in weakening the company's top line. Previously, the company strengthened its position in the domestic market by acquiring Cadbury and LU biscuits. However, going forward the company sees major growth potential in the emerging markets and has the great opportunity to establish a strong foothold therein.

Mondelez has recently made an announcement that it would "acquire an 80 percent stake in Kinh Do Corporation's category-leading snacks business in Vietnam, subject to the approval of Kinh Do Corporation's shareholders." If the deal goes through the proposed transaction of an 80% ownership stake in exchange for $370 million would be completed by the end of the second quarter of 2015 and would give Mondelez the opportunity to eventually take 100% of the business 12 months after the deal is completed.

Note that the company penetrated the Vietnamese market not too long ago and realized that the country's industry and consumer demographic profile offered tremendous opportunity to grow its top and bottom lines. This will enable Mondelez to combat the weaker industry prospects in the developed markets. Almost 60% of Vietnam's 90 million citizens are under the age of 30 and the middle class is also growing. Both of these trends mean that the snack business in the country has the potential to grow. However, Mondelez has not yet been able to generate profits from the region due to the absence of its own established distribution channels. In addition to that, Kinh Do's presence in the country largely overshadowed the company's Vietnamese operations up until now; therefore, the potential acquisition creates a great opportunity for Mondelez to stretch its wings in the new high growth market with Kinh Do's established distribution network.

Kinh Do is a great company that generates $175 million in annual revenues, has increasing Cash From Operations, and a declining level of debt. The company presently maintains a negligible debt to equity ratio while its revenues and profits in 2014 are expected to increase by 13% YoY and 6.6% YoY respectively. Mondelez's APAC operations account for 14% of its top line as per the latest earnings report. The acquisition would not only immediately improve the region's revenues but future growth is a given considering the industry characteristics.

Shareholder Returns

Mondelez has recently upped its full year earnings forecast from the previous EPS estimate of $1.73-1.78 to $1.82-1.87 per share. In order to boost its bottom line in the wake of weaker domestic markets, the company increased product prices which led to a 60 basis points improvement in the gross profit margin. The company also cut costs which helped it to improve its bottom line in spite of the weakening top line.

The improvement in per share earnings were also attributed to the company's efforts to reduce the diluted average share count as indicated in the figure shown below.

Source: Third Quarter Earnings

Concluding Remarks

Although the global food industry is expected to remain soft for the foreseeable future, the company's acquisition of Kinh Do will help it to counter the slow growth of the developed markets using the positive industry trends in the developing Vietnamese market. The company has already been trying to boost its bottom line through cost cutting, price increases, and share buybacks and the acquisition will help to bolster the bottom line by adding to its top line growth.

Although the comparison of the company's P/E of 35.3 to the industry P/E of20.2 deems the stock
overvalued in the market, the comparison of Mondelez's TTM P/E ratio with its forward P/E ratio of 19.7 makes the stock an affable candidate for investment.

http://seekingalpha.com/article/2685955-mondelez-international-aiming-for-growth?