Time to Feast on Shares of Undervalued Mondelez

Erin Lash: After nine months at the helm, Mondelez’s new CEO, Dirk Van de Put, has finally provided clarity as to the direction the firm is slated to embark upon and the gains he believes are likely to ensue from these plans. As we’ve surmised, the firm’s top priority hinges on igniting its sales trajectory, but the means by which it intends to do so are multifaceted, with management looking to extend the distribution of its fare into untapped regions and channels, while also focusing investments behind its core brands, which have been posting outsize growth. Based on these initiatives, management aims to post 3%-plus sales growth longer term, which aligns with our forecast.

But we never believed Van de Put and his team would opt to reignite its top line at any cost. Rather, based on his tenure at privately held McCain Foods and his recent rhetoric, we suspected he would opt to put the firm on a path to drive sustained, profitable growth. While management was reluctant to quantify its cost-savings objectives, we see an additional $1 billion in excess costs that it could remove on top of the $1.5 billion realized over the past several years, primarily by extracting further complexity from its operations (including rationalizing its suppliers, parting ways with unprofitable brands, and continuing to upgrade its manufacturing facilities). And in line with our thinking, management stressed that a portion of any savings realized would fuel additional spending behind its brand mix (in the form of both R&D as well as marketing), supporting the intangible asset that underlies its wide economic moat, which we view as prudent.

We expect Mondelez is on a course to drive accelerating sales growth while also posting margin gains over the next several years and think that investors should feast on shares, which trade at around a 15% discount to our $52 fair value estimate and the high-teens to low 20s price/earnings multiple of its wide-moat peers.