Mondelez Stock: Not Yet Taking A Bite (NASDAQ:MDLZ)

Investors in Mondelez (NASDAQ:MDLZ) had to digest quite some news flow so far in 2022. Besides the impact of raging inflation, pressure on consumer spending and geopolitical tension, investors now have to factor in a few bolt-on deals as well, as all these news events are worthy enough to update the investment thesis on Mondelez.

My last take on the company dates back a year ago, as I concluded that Mondelez has been transforming its snacking empire in recent years, following a turbulent and complicated corporate past.

Back To The Summer Of 2021

Mondelez is a snacking empire, home to leading brands which includes the likes of Oreo, Milka, Cadbury, and many others. ESG practices have put snacking and packaged good companies on the line, given their use of palm oil and cacao, among others, but also the health implications for consumers, yet these concerns still largely remain concerns, not yet having a real impact on the business.

Furthermore, Mondelez believes that snacking should be done right, being made out of more responsible input products, while being healthier for the environment and consumers as well, albeit that these are typically multi-year, or even decade-long transitions.

Despite the pandemic, Mondelez sold $26.6 billion in snacks in the year 2020, up 3% from the year before, with operating margins posted at 15%. The company posted net earnings of $2.2 billion, equal to $1.50 per share on the bottom line, translating into a sky-high 40 times multiple based on the shares exchanging hands at $60 last summer.

The balance sheet is quite complicated, as the company still holds an 8.4% stake in Keurig Dr Pepper, as well as another stake in JDE Peet’s. With a value of $6.0 billion in these stakes (in the summer of last year), the company operated with an adjusted net debt load of around $10 billion, equal to roughly 2 times EBITDA of around $5 billion. So if we monetize the equity stake in these two companies, leverage is very reasonable, as adjusted earnings were posted a dollar higher than the GAAP numbers, yet I was not happy to trust all the adjustments which resulted into an adjusted earnings number of $2.59 per share. With realistic earnings seen around $2 per share in my book, valuations were too demanding to get upbeat in my eyes.

With the situation being stable and the company starting 2021 on a solid note, the company embarked on some dealmaking in 2021. This includes a smaller deal for Gourmet Food Holdings and Grenade, as well as a $2 billion deal for Chipita S.A., which closed on the first day of 2022, adding nearly $600 million in croissants and related revenues. With shares trading at 22-23 times pro forma adjusted earnings of $2.80 per share, which I do not fully embark on, I was a bit skeptical and concluded that shares were fairly valued given the low interest rate environment (at the time).

Stable For Now

Since essentially a year ago, shares of Mondelez have been trading in a relatively tight trading range between $60 and $70 per share, now trading hands a couple of pennies below the lower end of the range.

In January of this year, Mondelez posted its results for 2021 with full year revenues up 8% to $28.7 billion, driven by a balanced mix of volume, pricing and acquisitions. Adjusted earnings per share were up 9% to $2.87 per share as the company did not provide a formal guidance of 2022, other than that it anticipates some currency headwinds amidst a stronger dollar.

In April, the first quarter results for 2022 revealed that the company started on a solid note with sales up more than 7%, more than entirely driven by organic growth. Adjusted earnings rose double digits to $0.84 per share, albeit that a great deal of growth was driven by pricing impact more than offsetting inflationary pressures. Dealmaking made that net debt inched up to $12.5 billion, if we treat the book value of the equity stakes as cash, still very manageable.

A share count of 1.4 billion shares trading at $60 translates into an $84 billion equity valuation for an enterprise valuation just shy of a hundred billion given the net debt load. This translates into premium valuations at just below 3.5 times sales. And if $3 in earnings per share is realistic, earnings multiples have contracted to 20 times earnings.

In the meantime, the company has been allocating quite some capital. The day before the release of the first quarter results, the company reached a deal to acquire Mexican confectionary company Ricolino in a $1.3 billion deal. The deal will add some $500 million in revenues, as a 2.6 times sales multiple is quite modest in relation to the valuation of Mondelez, but no margin details have been announced.

This deal was followed by a larger transaction in June, as the company reached a deal to acquire Clif Bar & Company, a US producer of organic energy bars. This deal is quite a bit more substantial at an upfront purchase price of $2.9 billion, that is ahead of non-quantified earn-out provisions. With $800 million in annual sales, the resulting 3.6 times sales multiple is in line with Mondelez itself as organic growth around 10% is solid, with again no margin details announced.

This marks the 9th deal since 2018, adding nearly $3 billion in sales to the business. Truth is that I am a bit skeptical on the nature of the deal, as energy bars are notoriously hard to brand, with different brands coming and going out of fashion at certain times.

So these bolt-on deals really bolster the earnings power of the business to levels around $3 per share, but on the other hand, near-term leverage will increase quite a bit. A pro forma net debt load of $12.5 billion by the end of the first quarter will jump to $16.8 billion, pushing up leverage a bit, but still likely far below 3 times with EBITDA likely trending around $6 billion now.

What Now?

Fast-forwarding since I last took a look at Mondelez, I must say that I am impressed with the solid earnings power displayed, organic growth and frankly dealmaking as well. Leverage is still manageable, as Mondelez has certainly pursued the M&A route here, yet there are still quite some questions on inflation, the impact of current conditions on discretionary spending, yet the biggest disappointment is that the resulting 5% earnings yield has become less compelling as interest rates have moved much higher.

That is valuation wise, as the company has been doing quite well from an operational point of view, yet we have to recognize the different (interest rate) environment, making me cautious to get involved as the spread with “risk-free” rates has narrowed a lot, albeit that Mondelez comes with certain inflation protection, of course.