A quick glance at the 5-year chart for Mondelez International Inc. (NASDAQ:MDLZ) shows MDLZ stock returning 10% annualized, plus about 2% in dividends. I think any investor would be thrilled to pick up 12% annualized returns on a company like this.
Except that the stock price does not actually reflect what’s going on underneath the hood. Inside, the engine is corroding. The fluids are black and gunky. The filters are clogged. Mondelez stock may be doing well, but Mondelez, the company, is in trouble.
Mondelez as a Company
MDLZ stock is truly a global entity, selling products in 165 countries, and is a conglomeration of many famous brands that were all purchased and sold by different entities over many decades. Today, you know most or all of their brands: Belvita, Chips Ahoy!, Nabisco, Oreo, Ritz, TUC, Triscuit, LU, Club Social, Barni, Peek Freans, Milka, Terry’s, Toblerone, Cadbury, Freia, Marabou, Fry’s, Trident, Dentyne, Chiclets, Halls, Stride and Tang.
Right now, as I look in my pantry, I see Chips Ahoy, Nabisco, Oreo, Ritz, Triscuit, Toblerone, Trident, and Halls. So, Mondelez isn’t going anywhere.
However, revenues have been destroyed over the past three years. Fiscal year 2013 started at $35.3 billion. However, FY14 came in at $34.2 billion, cratered to $29.6 billion in FY15, and further to $25.9 billion in FY16. The bleeding has slowed, with the trailing twelve months delivering $25.6 billion. In just three years, then, revenues at MDLZ stock have fallen almost 30%. The result was operating income, which was $3.97 billion in 2013, fell to $2.57 billion by FY16 – a decline of 35%. Net income from continuing operations is down to $1.66 billion from $2.33 billion.
This is catastrophic. Mondelez stock should be falling. It only pays a 2% dividend, and that’s nothing for income investors. What this tells us is how irrational the market it right now. When the market regains its senses, it will look at MDLZ stock, see the massive declines in revenue and net income, and sell it off.
The Reason Mondelez is Hurting
Why is this legacy provider of popular snack foods in trouble? The world has been moving away from sugary snack foods to healthy alternatives. Many of MDLZ foods are also high in salt, which cardiologists are warning folks about. Natural foods are the rage now.
One recent study showed that almost three-quarters of respondents say it is “moderately important” for snacks to have natural ingredients, and almost half saying it’s “very important.” Another study found two-thirds of respondents wanted fewer “undesirable” ingredients more than they wanted “beneficial” ones.
There’s very little the company can do to combat this trend, because it is global and it is not going away.
Bottom Line on MDLZ Stock
The only real pivot MDLZ can manage is to offer “healthier” versions of its famous brands. So, it has done things like cut out the high-fructose corn syrup and hydrogenated oils from Triscuits, and cut artificial ingredients from other products. By 2020, Mondelez management wants 50% of its products in what it calls the “well-being” category.
If you’ve perused any grocery store aisle, particularly those in a Whole Foods Market, you’ll see that flavoring comes from many different sources. Mondelez should be able to reformulate its goodies so that they aren’t exactly healthy treats, but they are at least less unhealthy than they used to be.
That being said, the stock is insanely overvalued, and I wouldn’t go near it.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 1,800 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
