Lockdowns and stay-at-home restrictions have helped in driving huge demand for snacks and beverages since the pandemic began. However, the fall in consumption in the away-from-home channels and supply chain disruptions had a notable impact on snack food and beverage companies.
The spike in at-home channel sales moderated in the third quarter but the demand for snacks, packaged food and beverages continues to be better than pre-pandemic levels as COVID-19 fears are impacting on-premise consumption.
Against this backdrop of changing dynamics, we will use the TipRanks Stock Comparison tool to place Mondelez International and PepsiCo alongside each other and see which stock offers a more compelling investment opportunity.
Mondelez International (MDLZ)
Mondelez is one of the largest snack companies and is known globally for its brands like Oreo, belVita, Cadbury Dairy Milk, Toblerone and Trident gum. It has been enhancing its snack offerings through continued innovation and strategic acquisitions.
In July, the company acquired a majority interest in Give & Go, a sweet baked goods maker and owner of the Two-Bite Brownies and the Create-A-Treat brands. Mondelez acquired a majority stake in Perfect Snacks, which has a strong presence in the refrigerated nutrition bars segment, in 2019 and Tate’s Bake Shop, a premium cookie and baked goods brand, in 2018.
The pandemic has adversely impacted Mondelez’s world travel retail sales, away-from-home channel and the traditional trade channel in certain key emerging markets. The gum category was severely dragged down by a drop in on-the-go consumption.
In 2Q, revenue declined 2.5% Y/Y to $5.9 billion even as the company’s North America business grew 17.3% to $2.0 billion. Excluding the impact of currency fluctuations and acquisitions and divestitures, the company’s organic revenue grew 0.7%.
Despite the weakness in the top-line, 2Q adjusted EPS grew 12.5% to $0.63 due to the company’s cost-containment efforts. In its 2Q conference call, Mondelez stated that it maintained or gained share in markets that represent about 85% of its year-to-date revenue. The company also said that overall business was trending better in July than in 2Q and it expects a sequential improvement in 3Q.
In the first half of the year, Mondelez generated free cash flow of $1.1 billion. In July, the company announced about an 11% hike in its quarterly dividend to $0.315.
As part of its efforts to reduce its costs and streamline its supply chain, the company is removing 25% of SKUs (stock keeping unit). The company intends to redirect its cost savings to brand-building efforts.
Focus on the e-commerce channel is also a key priority for the company, especially when consumers are increasingly shopping online for groceries amid the pandemic. E-commerce sales grew 91% in 2Q and accounted for 6% of the company’s 2Q revenue, up from 3.5% in 1Q.
After several back-to-back Buy ratings in recent months, Mondelez was downgraded on Thursday by Guggenheim analyst Laurent Grandet to Hold from Buy with an unchanged price target of $60. The analyst feels that the current valuation reflects the expected future revenue growth potential of about 3% to 4%, which is below some peers.
However, the analyst continues to believe that “Mondelez is a best-in-class US food company and, while it isn’t benefiting as much as peers during the pandemic due to the nature of its categories, we expect it to continue capturing global snack market share in the years ahead.” (See MDLZ stock analysis on TipRanks)
Meanwhile, the rest of the Street is bullish about Mondelez. A Strong Buy consensus is based on 12 Buys versus 1 Hold and no Sells. The stock has risen 5.9% year-to-date and the average analyst price target of $63.17 indicates an upside potential of 8.3% from the current levels.
PepsiCo’s snack food business, especially Frito Lay North America, has helped it in mitigating weakness in soda beverages over recent years as consumers are shifting to healthier options. The snack food and beverage giant has an extensive portfolio of brands, including 23 brands (like Frito-Lay, Cheetos, Doritos, Gatorade, Pepsi, Quaker and Tropicana) that generate over $1 billion each in estimated annual retail sales.
The COVID-19 pandemic hurt the company’s sales from the away-from-channels like restaurants. However, the situation improved in the third quarter. PepsiCo’s 3Q revenue increased 5.3% Y/Y to $18.1 billion while organic revenue growth was 4.2%. Adjusted EPS grew 6.4% to $1.66.
Frito-Lay North America and Quaker Foods North America divisions delivered organic revenue growth of 6% each as at-home food consumption continued to be strong amid rising COVID cases. PepsiCo Beverages North America division posted organic revenue growth of 3%.
With the exception of Africa, the Middle East, and South Asia division, the company experienced organic growth in all its international divisions. PepsiCo now expects organic revenue growth of about 4% and a 0.5% decline in its adjusted EPS in 2020.
Nonetheless, the company continues to expand its presence in growth areas. Earlier this year, PepsiCo acquired Rockstar Energy and entered into an agreement with Vital Pharmaceuticals for the exclusive distribution of Bang Energy drinks in the US in line with its strategy to expand in the energy drinks market.
It also acquired Be & Cheery, one of the largest online snacks companies in China. PepsiCo is improving its visibility and scale in its e-commerce business, which almost doubled in 3Q.
The company continues to focus on the innovation of healthier snack food and beverage categories. PepsiCo stated that Gatorade Zero, Bubly and Mountain Dew Zero Sugar together delivered over $1 billion in retail sales on a year-to-date basis. The company is also expanding the presence of Pepsi Zero Sugar, which has seen over 30% retail sales growth year-to-date.
PepsiCo is a dividend aristocrat (a company that has hiked dividends for at least 25 consecutive years) and raised its annualized dividend this year to $4.09 per share from $3.82 per share. This year marks the 48th consecutive year of dividend rise.
On Oct.12, Citi analyst Wendy Nicholson upgraded PepsiCo to Buy from Hold and increased the price target to $169 from $148. The analyst believes that PepsiCo's earnings growth can accelerate next year and its relative multiple can "expand considerably from current levels."
The analyst noted that PepsiCo has delivered the most consistent organic sales growth when compared to fellow mega-caps Coca-Cola and Procter & Gamble. Nicholson also says that while Pepsi has a lower operating margin than its peers, it has the largest potential to expand its operating margin in coming years. (See PEP stock analysis on TipRanks)
The Street is cautiously optimistic on PepsiCo stock. A Moderate Buy consensus is based on 6 Buys versus 5 Holds and no Sells. The stock has risen 3.5% so far in 2020 and could rise 7.7% in the coming months as indicated by the average analyst price target of $152.27.
Both Mondelez and PepsiCo have strong brands and extensive international presence. Mondelez has a dividend yield of 2.15% compared to PepsiCo’s yield of 2.87%. However, Mondelez stock has fared better than PepsiCo so far this year and has slightly more upside potential as indicated by the current average analyst price target. With a lower valuation as well as a more bullish Street consensus, Mondelez appears to be a better stock than PepsiCo right now.
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment