This Recent Spin-Off Has 20% Upside

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Who doesn't love to indulge with a sweet treat every now and then? (Especially when it's chocolate...) 

The likes of Oreos, Nabisco cookies and Cadbury chocolates are great places to start. To the rest of the world, these decadent goodies are foreign concepts -- but rising middle classes in emerging markets means these items are increasingly being made available to the masses. Meanwhile, snacks continue to be a staple in developed markets despite the rise in health consciousness. 

The best way to play the expanding emerging market wallet and global snack demand is Mondelez International (Nasdaq: MDLZ). With revenue of more than $35 billion last year, Mondelez is the maker of those Oreos, Nabisco cookies and Cadbury chocolates that U.S. consumers love so much -- but it also makes various other snacks and beverages, including Lu biscuits, Trident gums, Jacobs coffee and Tang drink powder.

Mondelez is the international business that was left after Kraft Foods (Nasdaq: KRFT) spun off its North American grocery business in 2012. The company sells nearly 60 brands in more than 165 countries. According to Forbes, the Mondelez brand is among the 50 most powerful in the world. 

The rapid rise of China's middle class is one of the biggest growth stories for the company. Mondelez has been getting its Oreos in front of Chinese consumers for a number of years, and it's already the market share leader for biscuits. It now plans to move its other products into other Asian markets, as Asia-Pacific currently represents only about 15% of the company's revenue. 

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  To capture more market share in China, Mondelez has increased its marketing and sales efforts for its Oreo and Chips Ahoy brands.  

Mondelez's China revenues have doubled over the past three years. It launched Stride gum in China last year, and the product is already accounting for about half of the company's revenue growth in the area. Driving this is Mondelez's focus on getting Stride into the "hot zone" near cash registers, the key area for impulse buys. 

To capture more market share in China, Mondelez has increased its marketing and sales efforts for its Oreo and Chips Ahoy brands. The company just launched its golden Oreo line of cookies and was able to get the product positioned in 500,000 outlets in just six weeks.

These growth opportunities should help boost cash flow generation and ultimately make Mondelez more shareholder friendly. As well, investors will likely see a piece of the $2.8 billion the company received from Starbucks (NYSE: SBUX) to settle a dispute over the coffee giant's packaged coffee. This award could be put toward share buybacks or additional dividends. Last month, Mondelez raised its buyback allowance nearly 30%, to $7.7 billion. Investors also get a 1.6% dividend yield. 

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Billionaire Nelson Peltz and his Trian Fund Management hedge fund own a large part of both Mondelez and PepsiCo (NYSE: PEP). There's been speculation that Peltz might push for a merger of Mondelez and PepsiCo's snack foods business. Peltz wants Mondelez to cut costs faster and improve its operating margin from 12% to 18%. With almost a $1.3 billion stake in Mondelez, Peltz certainly wants his voice to be heard by management and the board.

This month should be interesting since both Mondelez and PepsiCo have board nomination deadlines ahead of the annual general meeting. There is speculation that a boardroom battle could be possible as there are differing opinions on the direction for both companies. The result remains to be seen, but a merger would provide complementary products and geographical presences. 

Risks to Consider: Mondelez has a lot of exposure to unproven markets, and mishaps in these areas could lead to earnings growth coming in below expectations. The company also is taking on a number of new initiatives, some of which might take longer than expected to reach their goals.

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Action to Take --> Mondelez trades well below fellow snack makers Hershey (NYSE: HSY), Snyder's-Lance (Nasdaq: LNCE) and Inventure Foods (Nasdaq: SNAK). A price-to-earnings multiple of 25 on 2014 earnings of $1.71 a share suggests the stock should be trading at $42 in less than a year, which would be 20% upside from its current price.

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