Mondelez
International, the packaged-food company that reports earnings Tuesday after the market close, has seen its share climb 24% since Oct. 12. Analysts think it has more room to climb.
Mondelez sells popular brands from Oreo cookies to Cadbury chocolates to Philadelphia cream cheese. Although prices of these items have risen sharply over the past year, consumer demand has remained strong. Snacks are often considered an affordable luxury that can bring pleasure to life especially during difficult times.
“The pandemic fundamentally changed the consumer,” said Mondelez CEO Dirk van de Put in an interview with Barron’s last year. “Now indulgence is very acceptable, and it’s almost a necessity. People openly state that indulgence should be part of their day.”
For the first three quarters of 2023, Mondelez posted 17% top-line sales growth. While 14.6 percentage points of the growth was due to the higher prices of its product mix, sales volume increased as well, adding another 2.4 percentage points. The company has also expanded its footprint through 2022 acquisitions of Ricolino and Clif Bar.
While consumers have been trading down to cheaper alternatives in many other retail categories, there tends to be a stronger brand loyalty in confectioneries. The relative lack of cheaper private label competition has also helped Mondelez maintain much of its consumer base.
Despite the surging costs of key ingredients like cocoa and sugar, consumers’ unhinged love for Oreo and Mondelez’ other products have allowed the firm to keep its net operating margin stable at roughly 16%. For the first nine months of 2023, earnings per share grew 18.9% on a constant currency basis, offset by foreign exchange impact of 5.6 percentage points.
The strong performance has driven Mondelez to raise its outlook at the last earnings report. Excluding the impact of foreign exchange, management expects to see 14% to 15% organic net revenue growth for the full year of 2023, up from the prior outlook for a 12% growth. The firm’s guidance for adjusted earnings-per-share growth was also lifted to 16% from 12%.
“We believe the best remains ahead as we strengthen and reshape our portfolio, substantially reinvest in our iconic brands, and continue developing best-in-class capabilities in key enablers such as digital and revenue growth management to further drive high quality, sustainable growth for years to come,” said van de Put in the last earnings report.
Analysts are sanguine on Mondelez as well. “We think the company will stand out among food names by once again delivering volume growth after doing so across all geographies last quarter,” wrote Nik Modi, an analyst at RBC Capital, in a research note last week.
Still, Mondelez’ growth will likely slow down as inflation calms down and food prices stabilize. For the fourth quarter, Wall Street analysts expect the firm to deliver $9.3 billion in revenue, 7.6% growth from the year-ago period, and earnings to grow 6.8% to 78 cents per share. The company hasn’t missed bottom-line expectations since late 2021.
Food stocks were hit hard during the summer as investors became worried that a new class of weight-loss medications like Ozempic and Wegovy could drastically reduce consumers’ calorie consumption and hurt the food business. From Sep. 14 to Oct. 12, Mondelez shares tumbled 16% along with many of its peers.
But the stocks soon recovered as many executives at food and drug companies, as well as Wall Street analysts, claim that the fear is overblown. Bank of America analysts estimated that if 25 million to 50 million of Americans take the drugs by 2030, the total calorie consumption of the nation could be reduced by 1% to 3%.
The impact on Mondelez could be even smaller. Only one third of the food giant’s sales is generated in North America, which means the company is less exposed to the obese consumers here. The company also offers a range of healthier options like Clif Bars that some consumers might turn to in their weight-loss journeys.
“Tracked channel trends indicate a deceleration in the U.S., but we believe any domestic weakness can be offset by continued strength in emerging markets,” wrote RBC’s Modi.
With recent gains, Mondelez stock now trades at 21 times forward earnings—slightly higher than its five-year average. Wall Street thinks the stock has more room to grow: Ninety percent of the analysts tracked by
FactSet
have a Buy rating for Mondelez stock, with an average target price of $81.4—about 8% higher than the current level.
Still, risk remains: Commodity prices in cocoa, sugar, and butter continue to rise as abnormal weather patterns and supply-chain issues disrupt global output. If that continues, packaged-food companies like Mondelez will have to either absorb the costs and suffer narrower margins, or pass them onto shoppers with even higher prices.
So far, consumers have been willing to pay more for their favorite snacks. But eventually, there is going to be a breaking point.
Write to Evie Liu at evie.liu@barrons.com
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