Monday, 17 February 2014

Mondelez - consumer brands, emerging markets and...activism

Last week, I noted in the write-up of the Kraft results that the assets spun-out under the Mondelez name had significantly outperformed over the last year:

The company has been perceived as holding the more excitable consumer brands versus its previous parent Kraft.  Certainly with 40% (and growing) of its revenues in the emerging markets, there is a completely different corporate profile. 

The company is particularly strong in biscuits, chocolate, candy and powdered beverages - a legacy of combining a number of the leading Cadbury brands with others such as Oreo a few years ago. 
Despite these structural positives, the headline results last week were not so great though as summarised by these headlines from Seeking Alpha:
'Mondel─ôz International, Inc. (MDLZ): Q4 EPS of $0.42 misses by $0.02.Revenue of $9.5B (+0.2% Y/Y) misses by $100M'
So what is behind the two 'misses'?  Well, coffee and the developed markets were dull...

 ...and additionally note the positive but fairly lacklustre pricing.  Of the five regions the company operates in, Asia, EEMEA and Europe all had negative pricing during the year.

Was the performance disastrous though?  Looking at it from an overall portfolio growth perspective versus global peers (captured under 'global category growth') the answer is no...although gum/candy as well as the aforementioned coffee were weak. 

Still, headline constant currency EPS growth was very solid at just over 15% year-on-year in Q4 and 13.5% for the full year 2013 period.  As though with many consumer names there was a clear translation FX impact with pushed the respective growth rates for Q4 and FY13 down to 10.5% and 7.1% - still not headline disastrous at all.  The 'misses' noted above seems to be relative to inflated hopes going into the numbers. 

Looking forward to 2014, two forecasts strike me as interesting.  The first is that constant currency growth  hopes for 2014 remains resolutely double-digit.  Whilst this is on a constant currency basis - and hence actual reported levels are likely to be more akin to mid single digits (still good versus the broader consumer brethren) this is also slightly dampened by a higher tax rate.  In summary, growth is not too much of an issue for Mondelez. 

The second relates to free cash flow, where combined 2013-4 targets were edged slightly up, primarily due to lower anticipated capex levels in FY14.  The estimated US$1.4bn free cash flow is equivalent to 2.3% of the market cap - not so high a level although more than enough to cover the 1.6% dividend yield.  This is probably at a structural low point due to lumpy capex and - from a medium-term perspective - should return to the c. 4% level (more akin to that of a growth consumer name).  Net debt is just under x3 ebitda which is high but not a problem given the cashflows and market position.  The company has also flexibility to do things like reduce the buyback too (see later).  They are committed to maintaining an investment grade rating (currently BBB).  Half the outstanding debt is due in over five years time. 

Earnings-wise the company is trading on around x16 forward EV/ebit reflecting its growth orientation as well as residual hopes of higher structural margins in Europe/North America (c. 60% of revenues currently) where the company believes they are underperforming peers. 

Technically the US$32 level has been an important resistance/support level over the last year which the share has returned to a number of times (from both directions).  The importance of this level is further augmented by noting that the average buyback price for the US$2.7bn shares that the company bought back during 2013 was at...US$33.1.
Finally the activist investor Nelson Peltz continues to hold a stake (equivalent to c. 2.4% shareholding) and has now - as per this article - joined the board:
'Last month, Mr. Peltz was named to Mondelez’s board, following the investor’s claims the snack maker had done too little to cut costs'
So some good medium-term consumer market exposures and a degree of self-help scope (entrenched by the appointment of Nelson Peltz to the board).  The price is short-term a little full but, for non-holders, c. US$32 and each US$2 below that level provides an opportunity to build a position.  

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