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Mondelez International – Earnings Review 3QFY13

mondelez-international-earnings-review-3qfy13

Executive Summary

Mondelez International’s (MDLZ) revenues missed analyst expectations and the stock price fell, despite the fact that earnings beat estimates. Bidness Etc thinks the stock is undervalued by investors, as the tough environment in emerging markets is temporary and the company has the ability to improve earnings even during times of low revenue growth. Moreover coffee prices are forecast to increase, which will bump up revenues.

Stock Price Falls

Mondelez stock was down 4% the day after the announcement of third quarter results on November 6. The company beat consensus estimates for adjusted EPS (earnings per share) by 2%, but this did not save the stock price from falling.

Emerging Markets are Growing

Organic net revenue growth for the quarter was 5.3%, lower than the 6% that the company expected. This was due to lower coffee pricing and volatility in emerging markets. Although revenues from China were down by double digits due to a contraction in the country’s biscuit market, emerging markets still grew 10.7% overall which was double the company’s consolidated organic growth. The growth in emerging markets was primarily driven by double digit growth in Russia, India and Brazil.

Coffee Prices Expected to Rebound

The effect of net pricing was negligible as lower coffee pricing completely offset the positive impact from other products. Coffee prices were down 60% during the twelve-month period ending October 2013. Falling coffee prices and a slowdown in China led Mondelez to lower its organic revenue growth guidance for FY13 from 5% to 4%. However, it increased adjusted EPS guidance by 1.3% to $1.57-1.62.

The company has been able to grow its organic revenues despite the consistent and considerable fall in coffee prices. The pressure from lower coffee prices will likely not last long, as analysts expect prices to improve 12 cents in the fourth quarter of calendar year 2014 (4QCY13) and five cents in (1QCY14).

Mondelez Looks Strong Despite its Weak Performance in China

The fall in revenues from China’s biscuit market was primarily caused by a contraction in the overall growth for the product category as well as a weak retail environment. The fall in revenues however, is not, reflective of the company’s inability to compete in the Chinese market.

Performance by Region

All the regions showed growth in organic revenues, with strong sales volumes and a better product mix more than offsetting the negative impact of lower pricing.

The Asia Pacific region showed a 0.1% growth in organic revenues. The growth from volume and product mix more than offset the -4.6ppts (percentage points) impact of pricing. The results from developed markets in the region, and India, just managed to counter the lower performance in China. The company’s power brands in the region, which include Dairy Milk, Chips Ahoy!, Stride and Tang have shown 11% growth year-to-date (YTD).

In Latin America, organic revenues rose by a considerable 16.9%, mainly due to better performance in Brazil. The inflationary environment in the region further supported this; there was a positive impact of 13.1ppt of pricing on organic growth. The performance of power brands of 15% YTD was driven by Club Social, Oreo, Lacta, Halls and belVita.

Organic revenues in Eastern Europe, Middle East and Africa (EEMEA) were up 13%. Strong growth due to more sales and a better product mix more than offset the negative 3.4ppts impact from lower pricing (which was primarily due to lower coffee prices in Eastern Europe). Russia, Gulf Cooperation Council (GCC) countries, Ukraine and West Africa contributed most to the growth. Power brands have grown 14% YTD in EEMEA, mostly due to growth in the sales of Dairy Milk, Milka, Barni and Tang.

While the biscuit, chocolate and coffee categories performed well in Europe, the growth was partially offset by lower coffee prices. In North America, revenues from the gum category were lower, but the impact of growth from the biscuit and candy categories was more.

Conclusion

Although the company has lowered its guidance for revenues, it earnings results were commendable. An increase in EPS guidance despite lower expectations from revenues reflects the management’s confidence in its cost-cutting and efficiency plans.

The company has been showing organic growth despite falling coffee prices. Considering the consistent growth in volumes, an improvement in coffee prices can have a noticeable positive impact on the company’s growth.

Moreover, Mondelez stock is currently trading at a discount of 21% to that of its competitor, The Hershey Company (HSY); its forward P/E multiple is 19x compared to Hershey’s 24x and Bidness Etc remains bullish on the stock. For more on why we think Mondelez is a good investment opportunity, please read our article ‘Mondelēz International – Packed Full of Opportunities’.

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