Oreos Are Exciting, But Mondelez International Inc Stock? Not So Much

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MDLZ stock - Oreos Are Exciting, But Mondelez International Inc Stock? Not So Much

Source: Mike Mozart via Flickr (Modified)

Oreos always make for an exciting snack. There’s so many ways to eat them. You can eat an Oreo all at once. Or you can dip it in milk and take nibbles. Or you can take the snack apart, lick the middle, and then eat the outside cookies. Unfortunately the company behind Oreos, Mondelez International Inc (NASDAQ:MDLZ), isn’t as exciting. MDLZ stock hasn’t done much of anything for the past two years. And it won’t do much of anything into the foreseeable future.

Here’s why.

Mondelez Stock Suffers from Overvaluation

MDLZ stock has been the definition of a “going nowhere” stock. Mondelez stock has fallen 3% over the past 12 months, versus a 20% gain for the S&P 500. Over the past 24 months, it is down 2%, versus a 35% gain for the S&P 500.

The lack of movement in Mondelez stock price can be attributed to a rather mundane growth narrative. Top-line growth rates have hovered in the 1% to 4% range. There are some margin expansion drivers in place, and there is a solid dividend accompanying healthy buybacks. But the sum total is unexciting earnings growth just north of 10%.

That level of earnings growth would lead to out-sized stock price growth if the forward earnings multiple were around 12 to 17. But the forward earnings multiple has consistently hovered around 20, which is a 100% premium to growth prospects.

The market trades at a lower premium (roughly 90%), so MDLZ stock doesn’t offer investors any favorable asymmetry relative to the broader market. It actually offers considerably less bang for your buck considering the amount of leverage on the balance sheet (nearly $19 billion in debt versus less than $1 billion in cash).

Consequently, the numbers haven’t given investors any reason to buy MDLZ stock.

Mondelez Stock Will Continue to Trade Sideways

The big problem is that this sideways run in Mondelez stock will persist.

Growth will only slow over the next several years. Revenue growth is already slowing (3.7% in 2015 to 1.3% in 2016 to 1% expected in 2017), and Mondelez will be lucky to keep revenue growth at 1% per year over the next several years given that the company finds itself on the wrong side of a  secular shift in the packaged food space.

Organic snacks are in. Junk food snacks are out. Unfortunately, MDLZ’s snack portfolio is full of relatively unhealthy snacks. That is why snack growth has sharply decelerated over the past several years, dragged by sizable losses in the company’s Gum & Candy segment. These losses will persist, and current low revenue growth rates are likely here to stay into the foreseeable future.

Meanwhile, margins may be nearing a top. Gross margins have been weighed by higher input costs, especially on the dairy front. But overhead expense reductions have more than offset gross margin weakness, and adjusted operating margins have been expanding by ~100 to ~200 basis points.

Margins are expected to continue to expand by roughly 100 basis points next year, but management hasn’t provided margin guidance out to 2019, implying that 17% to 18% adjusted operating margins may be the top.

Consequently, with revenue growth slowing to 1% and margin expansion drivers starting to fade, earnings growth over the next several years will likely be less than 10%. But Mondelez stock continues to trade at more than 20-times this year’s earnings estimate.

That hasn’t been a favorable set-up for Mondelez stock over the past 24 months, and it won’t be a favorable set-up for MDLZ stock going forward.

Bottom Line on MDLZ Stock

I love Oreos. But I don’t love Mondelez stock. At best, it feels fairly valued here. At worst, this stock could fall as organic snacks continue to eat market share.

All in all, avoiding Mondelez stock at these levels seems like the right move.

As of this writing, Luke Lango did not have a position in any of the aforementioned securities. 


Article printed from InvestorPlace Media, https://investorplace.com/2018/01/oreos-exciting-mondelez-international-stock-not-so/.

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