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Can Savings & Growth Efforts Revive Mondelez (MDLZ) in 2019?

Zacks Equity Research

Investors are apprehensive regarding Mondelez International, Inc. MDLZ, evident from the stock’s 5% decline year to date compared with the industry’s fall of 21.6%. The downside was primarily caused by weakness in the Brazil and North American businesses. Also, currency fluctuations and stiff competition are concerns. Nevertheless, the company’s efforts to drive revenues and reduce costs look impressive. Let’s take a closer look at these initiatives and see if they can revive the stock in 2019.

Growth Efforts Look Impressive

Mondelez is a popular name in confectionary delicacies especially chocolates, courtesy of a robust brand portfolio. Moreover, the company is undertaking efforts to ensure that products meet consumers’ needs aptly and suit their changing preferences. These strategies are expected to help maintain the company’s competitive position.

To cater to such objectives, the company frequently refreshes brand portfolio through innovation and extension of its brands to newer geographies and platforms. Incidentally, the company recently introduced the innovation platform — Joy Fills. This platform, launched in Europe, is designed to cater to growth in brands like Oreo, Cadbury and Milka. Also, the introduction of Lickables in India is yielding. Further, management plans to continue innovating products under the SnackFutures platform.

Apart from these, the company is keen on expanding the business through acquisitions. In July 2018, it completed the acquisition of 13.8% ownership in the Keurig Dr Pepper business. Previously, Mondelez concluded the buyout of Tate’s Bake Shop, one of the fastest growing biscuit brands in the United States. In fact, during the third quarter, Tate's Bake Shop contributed significantly toward the top line.  Also, in January 2018, the company teamed up with Post Consumer Brands, a business unit of Post Holdings POST, to create two cookie-inspired breakfast cereals.

Moreover, to strengthen presence across digital media, Mondelez has formed global strategic partnerships with Facebook FB, Google and Amazon AMZN in the United States. Further, the company is strengthening presence in high-growth channels like e-commerce, discounters, convenience stores and traditional trade. The company expects that e-commerce, its fastest growing platform, can generate $1 billion in annual revenues by 2020.

Saving & Pricing Initiatives to Boost Profits

Mondelez is taking major steps to enhance productivity savings that boost margins, cash flow and returns on invested capital. Such savings initiatives were a fundamental aspect driving profits in the third quarter of 2018. In fact, during the quarter, productivity savings and higher pricing led to adjusted gross margin improvements of 110 basis points (bps) year on year. Also, adjusted operating margin expanded 40 bps year over year on the back of pricing and productivity savings.

Additionally, the company is gaining from higher cocoa cost. Management stated that it continues to strike the right balance between volume and profit through disciplined pricing.  Backed by such upsides, the company expects adjusted operating margin to be 17% in 2018, up almost 70 bps from the year-ago tally. Further, it anticipates double-digit growth in currency-neutral adjusted earnings per share in 2018.



Can Efforts Counter Challenges?

Operational challenges have been limiting Mondelez’s North America business unit. This weighed upon the region’s volumes and revenues in the third quarter of 2018. Although the company is working toward uplifting the region’s performance by investing in improved systems and expansion of capabilities, a turnaround is likely to take time. Further, the quarter continued to witness weaknesses in Brazil, thanks to price gaps. Also, management anticipates negative impacts from currency fluctuations in 2018.

Nonetheless, Mondelez’s strong market presence along with robust measures to drive revenues and savings are likely to help the company brave the aforementioned challenges. Such effective policies are expected to lift investors’ confidence in this Zacks Rank #3 (Hold) stock.  

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

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