Will Cost Saving Plans Aid Mondelez's (MDLZ) Q1 Earnings?
Mondelez International, Inc. MDLZ is set to report first-quarter 2018 results on May 1, after market close.
The company delivered a positive earnings surprise of 1.79% last quarter. The company surpassed estimates in all the trailing four quarters, with the average positive surprise being 4.43%.
Mondelez has been facing challenges to boost its volume since 2014, primarily due to soft consumer demand. In fact, the food industry, including legacy brands like General Mills Inc. GIS, The Kraft Heinz Company KHC and The Kellogg Company K, has been displaying a dismal performance for quite some time to boost sales.
Let’s Have a Look at Mondelez’s Past Performance
Mondelez witnessed a decline in revenues in nine out of the last 11 quarters, primarily due to lower demand. Mondelez’s sales were down 0.1% and its volumes decreased 0.6 percentage points (pp) in 2017.
Resultantly, the company’s share price has declined more than 9% in the past year, compared with its industry decline of 15.3%.
In the last reported quarter, Mondelez’s net revenues increased 2.9%, courtesy of the Power Brands and favorable trends in emerging markets. Emerging markets’ net revenues rose 6.3% and the Power Brands witnessed a 3.7% increase in revenues.
Regionally, Latin America, Asia, Middle East & Africa (AMEA) and Europe registered an increase of 4.2%, 2.6% and 5% in revenues, respectively. However, North America’s revenues declined 0.6%.
Organic revenues increased 2.4%, softer than 2.8% in the third quarter of 2017. The improvement was primarily driven by the Power Brands as well as strong performance in Latin America and Asia, Middle East & Africa.
Pricing increased 2.1 pp, more than 1.5 pp in the preceding quarter. Volume/Mix had a positive impact of 0.3 pp on the revenues. In the third quarter, it was 1.3 pp.
Let’s See How Things are Shaping Up for Q1
In order to counter the tepid sales trend, Mondelez has been focusing on innovation and brand building. The company has also undertaken some major steps to improve margins, cash flow and return on invested capital.
Mondelez’s advertisement spend is biased toward the high-margin Power Brands. Mondelez is increasing investments in in-store execution and advertising to support the Power Brands and innovation, funded by cost savings from its restructuring plans. The company is thereby reaping benefits from the Power Brands that include Oreo, Cadbury Diary Milk, Halls and Tang. The trend is expected to continue in the to-be-reported quarter as well, with improved volumes in its Power Brands. Higher sales from its wellness product portfolio are also anticipated to support its revenue growth. Further, improvements in China, Europe, Russia and India, along with strong pricing in the emerging markets are added positives. Notably, the company has been experiencing improvements in the emerging markets.
However, softness in North America due to a tough retail environment will mar the growth rate to some extent.
Segment Wise: Mondelez’s Europe revenues, comprising about 37.8% of the total revenues, are likely to witness 8.5% decrease sequentially but 6% year-over-year improvement to $2.6 billion, per the Zacks Consensus Estimate. North America segment, comprising about 26.2% of the total revenues, is expected to witness $1.64 billion of revenues in the first quarter, compared with $1.8 billion in the last reported quarter and $1.65 billion in the year-ago period.
Latin America revenues of $921 million indicate an increase from $900 million in the preceding quarter and $910 million in the prior-year quarter.
Coming to the company’s bottom line, the snacks giant surpassed analysts’ expectations for earnings in nine of the past 11 quarters. Despite lower sales growth, the company has managed to boost its profit level, banking on effective promotional strategies, introduction of nutritious products, cost-saving and restructuring initiatives that benefited it at large.
However, higher commodity prices, primarily on dairy products, and increased trade spending are likely to adversely impact its gross margins. Then again, the company’s zero-based budgeting program, productivity savings and lower overhead costs are expected to boost its operating margin.
Overall, first-quarter bottom line is expected to witness solid growth from higher pricing, higher volumes, as well as lower overhead and increased productivity savings, partly offset by higher input costs.
For the first quarter, the Zacks Consensus Estimate for earnings is pegged at 61 cents, reflecting a 15.1% year-over-year increase. Meanwhile, the Zacks Consensus Estimate for total revenues is pegged at $6.66 billion, implying 3.8% growth.
Mondelez International, Inc. Price and EPS Surprise
Mondelez International, Inc. Price and EPS Surprise | Mondelez International, Inc. Quote
Quantitative Model Prediction
Here is what our quantitative model predicts:
Mondelez does not have the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — to increase the odds of an earnings beat.
You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Zacks ESP: Mondelez has an Earnings ESP of +0.34%.
Zacks Rank: Mondelez carries a Zacks Rank #4 (Sell) and we caution against stocks with a Zacks Rank #4 or 5 (Strong Sell) going into the earnings announcement, especially when the company is witnessing negative estimate revisions.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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General Mills, Inc. (GIS) : Free Stock Analysis Report
Kellogg Company (K) : Free Stock Analysis Report
Mondelez International, Inc. (MDLZ) : Free Stock Analysis Report
The Kraft Heinz Company (KHC) : Free Stock Analysis Report
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