Published March 1st, 2017 by Nicholas McCullum
Warren Buffett is one of the most famous – and most successful – investors of all time.
As the chairman and Chief Executive Officer of Berkshire Hathaway (BRK.B), Buffett has an investment track record that is unmatched. Luckily, investors can piggyback off of Buffett’s success by looking at Berkshire Hathaway’s dividend stock portfolio. Buffett is required to disclose his holdings through 13F filings, which are filed with the Securities and Exchange Commission and detail the company’s portfolio of common stock investments.
Mondelez International (MDLZ) is a holding in Berkshire Hathaway’s portfolio, though rather small compared to some of Buffett’s larger bets.
The Oracle of Omaha has a 578,000-share stake in Mondelez, worth approximately $25 million. Buffett reported no buying or selling of Mondelez stock in 4Q2016, and has owned Mondelez since the second quarter of 2007.
Mondelez was once part Kraft Foods (KRFT). Kraft in turn was part of Altria (MO) – then Philip Morris (PM). This course of corporate spin-offs robs Mondelez (and the other companies named) of its Dividend Aristocrat status.
The Dividend Aristocrats are a group of S&P 500 businesses with 25+ consecutive years of dividend increases. You can see the full list of all 51 Dividend Aristocrats here.
This article will discuss the investment prospects of Mondelez International in detail.
Business Overview & Current Events
Mondelez International is one of the world’s largest snack companies with a market capitalization of $68 billion and fiscal 2016 net revenues of $25.9 billion.
Mondelez owns many highly successful products. As an American consumer, there is a high probability that you hold some of the company’s products in your cupboard right now. Some of their more popular brands include:
- Teddy Graham
- Cadbury Chocolate
- Trident chewing gum
Mondelez enjoys a high degree of geographic diversification. Its products are sold around the globe, and the company is divided into four regions for reporting purposes:
- Latin America (13.1% of 2016 net revenue)
- Asia, Middle East, & Africa (22.4% of 2016 net revenue)
- Europe (37.6% of 2016 net revenue)
- North America (26.8% of 2016 net revenue)
On February 7, Mondelez announced financial results for the three-months and full-year ending December 31, 2016.
The company’s results were mixed, although their financials are admittedly a bit difficult to digest because of the significant M&A activity that Mondelez has experienced in the past year. Most importantly, Mondelez divested of their coffee business, which is the main reason why the company’s GAAP revenues declined 12.5% in fiscal 2016.
The effect of this divestiture can also be seen in Mondelez’ GAAP profitability metrics, shown below alongside adjusted figures.
To gain more insight into the differences between the company’s GAAP financials and adjusted financials, a reconciliation between the two figures can be seen below. First, for revenues:
Source: Mondelez Fourth Quarter Earnings Presentation, slide 17
And next, for diluted earnings-per-share.
Source: Mondelez Fourth Quarter Earnings Presentation, slide 22
Looking into the reconciliation between GAAP and Non-GAAP results yields the result I expected – the difference is mostly because of acquisition-related activities (in particular, a significant $4.05 per share gain in 2015 due to the coffee business divestiture).
With that in mind, I believe Mondelez’ adjusted earnings paint a better picture of the company’s actual financial condition. Investors should be pleased to see adjusted earnings up 24.1% on a constant-currency basis.
Looking ahead, one of the major growth catalysts for Mondelez is the cross-selling of the company’s products between its different geographic regions.
The company manufactures many regional products which have the potential to gain market share internationally. This will boost revenues if executed properly.
One example of this cross-selling opportunity is Mondelez’ Milka Oreo chocolate bars, which enjoy extreme popularity in Europe and are being introduced in the United States.
Mondelez’ management has also targeted eCommerce as a potential avenue for growth. Since many of Mondelez’ customers are repeat customers, the company can benefit by setting up online order systems and automating the distribution process. Mondelez is targeting $1 billion in online sales by fiscal 2020 (for perspective, the company had $25.9 billion of net revenues in fiscal 2016).
There has also been rumors that Mondelez will be acquired by another company. These rumors ramped up considerably after Mondelez’ failed takeover of Hershey (HSY) in the middle of 2016.
The main purchase candidate appears to be Kraft Heinz (KHC), which just to happens to be another Warren Buffett favorite and the largest holding in Berkshire Hathaway’s investment portfolio.
Regardless of who the acquirer may be, an acquisition of Mondelez by another company would certainly be a catalyst for this stock.
Competitive Advantage & Recession Performance
Mondelez’ competitive position is based on the popularity of its product portfolio.
As I mentioned in the introduction, many of the company’s products are nearly ubiquitous. It is difficult to find a cupboard in the United States (or internationally) that hasn’t held some of these products at one point or another.
Source: Mondelez 2017 CAGNY Presentation, slide 12
As a snack provider, I would expect Mondelez to perform well in the event of an economic recession. The company’s products are relatively inexpensive and will not be targeted by consumers in an effort to trim the fat from their budgets.
Mondelez’ recession resiliency can be quantitatively assessed by looking at their earnings-per-share performance during the 2008-2009 financial crisis.
- 2007: $1.82
- 2008: $1.88 (3.3% increase)
- 2009: $2.03 (8.0% increase)
- 2010: $2.02 (0.5% decrease)
The company remained profitable and actually increased their earnings-per-share during the financial crisis.
Thus, Mondelez appears to be a company with a high degree of recession resiliency based on both historical performance and the nature of their business model.
Valuation & Expected Returns
Total returns for Mondelez shareholders will come from its dividend yield, earnings-per-share growth, and valuation expansion/contraction. Considering each of these points in turn will give a sense of the company’s future investment prospects.
On February 3rd, Mondelez declared a quarterly dividend payable on April 13th in the amount of $0.19 per share. Annually, this equates to $0.76 in dividends. Combining this with the company’s current stock price of $43.77 gives a forward dividend yield of 1.8%. This is just shy of the S&P 500’s average dividend yield of 1.9%.
Looking next at earnings-per-share growth, it’s important to consider the company’s historical track record. After all, a management team with a strong record of growing per-share earnings is more likely to do so in the future, all else being equal.
The following diagram presents Mondelez’ earnings-per-share since 2006.
Source: Value Line
Unfortunately, Mondelez’ earnings per share history is rather lackluster. The company’s 2016 adjusted earnings per share of $1.94 is exactly what it was in 2006, presenting a ‘lost decade’ for the company’s shareholders.
Looking ahead, I expect the company’s bottom line growth to be significantly better based on the growth prospects discussed earlier. Mondelez shareholders will also benefit from continued share repurchases. Mondelez’ fantastic record of repurchasing shares in recent years can be seen in the following diagram.
Source: Mondelez Fourth Quarter Earnings Presentation, slide 11
Due to improved business results and share repurchases, I expect Mondelez’ long-term earnings-per-share growth rate to be in the range of 3%-6%.
The last contributing factor to Mondelez’ total returns is the company’s valuation. The best way to assess this is by comparing current valuation to historical valuation.
In fiscal 2016, Mondelez reported $1.94 of adjusted earnings-per-share and $1.05 of GAAP earnings-per-share. Based on Mondelez’ current stock price of $43.77, this equates to a price-to-adjusted-earnings ratio of 22.6 and a price-to-GAAP-earnings of 41.7.
While these are in stark contrast, it is likely that adjusted earnings are more indicative of Mondelez’ true earnings power because the reconciliation that was discussed earlier in this article.
The following diagram compares Mondelez’ price-to-earnings ratio to its historical average (both based on adjusted earnings). The chart also includes Mondelez’ forward price-to-earnings ratio, based on Value Line’s estimate of $2.25 for 2017.
Source: Value Line
Mondelez appears to be trading slightly above the company’s history valuation. This is fine, though, since the company’s future growth prospects appear better than in the past, and the current low interest rates environment increases valuation multiples in the stock market in general.
With all this in mind, Mondelez is probably trading slightly above fair value. I do not expect valuation expansion/contraction to be a significant contributor to total returns moving forward.
To summarize, Mondelez’ expected total returns will be composed of:
- 1.9% dividend yield
- 3%-6% earnings growth (boosted by share repurchases
For total expected returns in the range of 4.9%-7.9%. Valuation changes are unlikely to affect these returns in a material fashion.
While it is unwise to blindly follow Warren Buffett into investment opportunities, his ownership in a company is seen as a ‘seal of approval’. After all, Buffett did not become a billionaire by initiating long-term positions in low-quality companies.
Buffett’s stake in Mondelez International indicates that it is a high-quality business. However, the company’s growth prospects are solid, not great. The company also has a lackluster record of delivering shareholder value.
Mondelez does not present a compelling investment right now. It remains a hold for investors who currently own shares.