A promising future for Mondelez, if cost-cutting succeeds

Photograph of Mondelēz International Headquarters, located at Three Parkway North, Deerfield, IL. Photo by Mike Mitchell/Wikimedia Commons

By Sony Kassam

Known for its Cadbury chocolates and Oreo cookies, the snacks food and beverage company Mondelez International Inc. has a hopeful long-term future, analysts say, if it continues to shrink costs, improve efficiency, and survive the volatile commodity market.

The Deerfield, Ill.-based company is a leading provider of confectionary products with over $3 billion in annual sales. Over the past six months, Mondelez has taken multiple actions to expand its business overseas and upgrade its aged facilities as a way to advance the company’s growth and reduce supply chain and overhead costs.

A Bloomberg survey of 17 analysts estimates a 12-month target price of $48.82, up a formidable 18.7 percent from Wednesday and a 0.5 percent increase from the 52-week high of $48.58. Mondelez’s stock traded Wednesday at $41.12, up 13.9 percent from a year ago. Of 26 analysts surveyed, 18 recommend buying it, while seven say hold.

“The strength of the firm’s competitive positioning is evident in its adjusted returns on invested capital, which have historically exceeded our 7 percent weighted average cost of capital estimate,” wrote Morningstar senior equity analyst Erin Lash in a report, “and we forecast that ROICs will approach 17 percent over the next five years, supporting our stance on the firm’s wide economic moat.”

During a third quarter conference call in October, Mondelez’s management reiterated its intention to save $1.5 billion annually by 2018.

Morningstar expects cost-reduction efforts to result in even greater savings than Mondelez’s target, money that would be allocated for brand marketing to support its intangible assets. Recently, Mondelez released two new Oreo cookie flavors to the U.S. market, Red Velvet and Cinnamon Bun, and launched a new “Open Up with Oreo” campaign.

Oreo Cookies New Flavor
Two flavors of Oreo cookies were released earlier this month, both of which will join Oreo’s permanent product line-up in the U.S. (Sony Kassam/MEDILL)

“We expect the firm will bump up its research and development and marketing spend to more than 8 percent of sales over the next 10 years (or $3.5 billion), above the nearly 6 percent of sales ($2 billion) it has historically allocated toward brand reinvestment,” wrote Lash.

Mondelez acquired an 80 percent stake in Vietnam’s leading snacks business, Kinh Do, in July 2015. The acquisition joined Kinh Do’s mooncakes and other goods with Mondelez’s global brands, allowing Mondelez to be exposed to 90 million consumers of snack products in Vietnam, according to a press release.

During that month, Mondelez also invested more than $130 million to open up four new manufacturing lines in Salinas, Mexico. The construction is expected to be complete in the middle of this year.

With these new manufacturing lines in place, the company’s Chicago plant will eliminate its nine old and inefficient lines, moving its Oreo, Ritz and Honey Maid graham crackers operations to Mexico. Last week Mondelez confirmed pending layoffs at its Southwest Side plant, which currently has 277 workers.

Additionally, in September 2015, Mondelez opened a $30 million manufacturing line in Poland to support the growth of the European confectionary business as a way to reduce costs and improve productivity.

Mondelez is also on its way to migrating more than 40 percent of its white-collar jobs, such as human resources and finance, to global shared service centers that serve multiple companies. According to Chairman and CEO Irene Rosenfeld in October, this migration will “reduce cost on average by half, enabling additional savings through and beyond 2018.”

Irene Rosenfeld, chairman and CEO of Mondelez International, talks during Fortune’s Most Powerful Women Summit in 2012. ( Stuart Isett/Flickr)

During the third quarter conference call, Brian Gladden, chief financial officer and executive vice president of Mondelez International, said reducing the company’s supply chain and overhead costs “has enabled us to expand operating margins in each region while also fueling incremental investments behind our Power Brands and innovation platforms to drive revenue growth and improve market share in our key markets and categories.”

Analysts at Zacks Investment Research believe Mondelez is “well on track” to fulfill its 2016 adjusted operating margin target of 15 to 16 percent. They maintain a hold rating for the company.

The adjusted operating margin excludes impacts of the company’s 2012 spin-off costs and its restructuring programs as well as acquisition integration costs, according to a Mondelez press release.

Chartered Financial Analyst at Argus Research John Staszak also recommends holding Mondelez’s shares, but his adjusted operating margin estimate is down 0.4 percentage point from Mondelez’s target.

“Reflecting supply-chain improvements, more efficient ad spending and staff reductions, we expect the adjusted operating margin to increase from 12.9 percent in 2014 to 13.8 percent in 2015 and 14.6 percent in 2016,” Staszak wrote in a report.

During the most recent quarter, the adjusted operating margin for Mondelez was 14.1 percent.

However, Morningstar anticipates that Mondelez’s reinvesting, following mergers and acquisitions, will “take top billing over the next few years.”

Challenges still remain for Mondelez from input cost pressures of raw commodities such as cocoa. In May, it finalized a $400 million cocoa sustainability program in Indonesia, and in July, the company’s coffee business merged with D.E. Master Blenders 1753 to form a new Dutch coffee company. Mondelez received a 44 percent stake in the merger.

In an e-mail, Lash, of Morningstar, said the headwinds “are likely from higher transportation costs because of a truck driver shortage and higher cocoa” and they “have persisted, signaling that macro tailwinds have failed to enhance its profitability.”

Lash further stated that Mondelez’s new production lines have not proved profitable yet as start-up costs have meant that  savings are only slowly emerging from the new, efficient manufacturing processes.

“So while we think the prospect of further cost improvement is viable, we presume the market could lose sight of Mondelez’s long-term potential if operating margins hit a snag,” Lash wrote in the e-mail.

Morningstar forecasts that dividends paid by Mondelez will grow in the high single-digit percent range annually through 2024. The dividends have indeed been rising over the past few years. Mondelez paid a total dividend of 64 cents per share in 2015, up from 58 cents per share in 2014 and 54 cents in 2013.

Annual dividends per share since 2013 (in dollars)

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Analysts predict dividends paid by Mondelez to hit high single-digit range in 2016 based on trend. (Sony Kassam/MEDILL)

Morningstar estimates $1.85 earnings per share diluted for 2015 and $2.21 earnings per share diluted for 2016, making the latter forecast a 19.5 percent increase from the 2015 estimate. Meanwhile, Argus Research estimates $1.75 earnings per share for 2015 and $2.06 for 2016.

Mondelez will release its fourth quarter and full-year earnings for 2015 on Wednesday, Feb. 3.

Photo at top: Photograph of Mondelez International Inc. headquarters, located at Three Parkway North, Deerfield, Ill. (Mike Mitchell/Wikimedia Commons)