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Mondelez Gains From Buyouts & Savings, High Costs a Worry

Zacks Equity Research

Although high costs and other headwinds are making matters sour for most food companies, few such as Mondelez International, Inc. MDLZ have managed to keep their appeal, on the back of prudent strategies. Mondelez, a renowned name in snacking and chocolates, has been gaining from endeavors like cost savings and prudent acquisitions. Let’s take a closer look.

Lucrative Measures to Boost Performance

Mondelez prides in its strong portfolio, adorned with popular brands like Cadbury, Toblerone, Milka, Tang powdered beverages and Halls candies amongst others. Moreover, the company has been striving to expand brand strength through buyouts. In July 2018, the company completed the acquisition of 13.8% ownership in the Keurig Dr Pepper business. Prior to this, last June, Mondelez concluded the buyout of Tate’s Bake Shop. Tate’s has been one of the fastest growing biscuit brands in the United States and complements Mondelez’s portfolio. The buyout has been driving revenues for a while. Also, in January 2018, the company teamed up with Post Consumer Brands, a business unit of Post Holdings POST, to create two new cookie-inspired breakfast cereals. The company plans to continue making acquisitions to gain scale in its categories and distribution capabilities.

The company is also engaging in innovations and extending brands to newer geographies and platforms. Notably, Mondelez has been striving to expand its snacking portfolio, and has accordingly developed theSnackFutures innovation hub.  As part of this platform, the company recently made investments in Uplift Food, a start-up firm engaged in developing prebiotic functional foods.

Further, it is increasing investment toward in-store execution and advertising to support Power Brands. Additionally, to strengthen presence of brand banners across digital media, the company has formed strategic partnerships with biggies like Facebook FB and Amazon AMZN. The company is also improving its presence in high-growth channels like e-commerce, discounters, convenience stores and traditional trade.

Apart from this, Mondelez is undertaking major steps to enhance productivity savings that are fueling margins, cash flow and returns on invested capital. Markedly, such initiatives supported the company’sprofitability in the fourth quarter of 2018. During the quarter, productivity savings and higher pricing led to adjusted gross margin improvement of 90 basis points on a year-over-year basis.

Wrapping Up

We note that Mondelez is exposed to significant currency fluctuation risks. In fact, during the fourth quarter, adverse currency movements dented the company’s top line. Going ahead, management anticipates currency fluctuations to negatively impact net revenue growth by nearly 3%in 2019. Currency is also likely to weigh on adjusted earnings in 2019, by nearly 7 cents. Furthermore, rising raw material costs, as well as selling, general and administrative expenses are a threat to the company’s profitability.

Nevertheless, we expect this Zacks Rank #3 (Hold) company to tide over such hurdles, gaining from efficient cost-minimization efforts. In addition, the company’s brand building moves are yielding and are expected to aid sufficient revenue growth to cushion the shortcomings. Such well-chalked efforts to boost performance are raising investors’ optimism in the stock, which has improved 7.6% in the past three months, against the industry’s decline of 5.8%.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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