Mondelez International: Go Long on Growth

by Jason Jenkins

Earlier this month, Investment U dividends expert Marc Lichtenfeld told you why to avoid Kraft Foods Group (Nasdaq: KRFT) after the news that it was splitting with its international business unit, Mondelez International (Nasdaq: MDLZ). Today, I’m going to make the case for investing in Mondelez…

Here’s the gist of the announcement, in case you missed it:

Kraft Foods, the world's second-largest food company, recently completed its plans to spin-off its mature North American grocery business. With annual revenue of $54.4 billion in 2011, Kraft announced its plans to split into two publicly traded companies in August of last year. If you owned a share of KFT now, with the split you’ll get one share in the new business for every three you previously held.

Here’s the skinny on the deal…

When the company announced last summer that it would split into two entities, the reason was to give a better value to its stockholders. It was evident that there were two distinct companies within Kraft. There was the mature North American grocery business and a global snack-food aspect.

Kraft Foods Group is the North American business and it has many popular long-standing brands like Oscar Mayer, Kool-Aid, Velveeta and Planters. The new snack-food business is now known as Mondelez International. MDLZ possesses all the dental nightmares that include high-growth products Cadbury, Oreos and Chips Ahoy.

Kraft Foods Group intends on paying out a $2 annual dividend, which would result in a yield of 4.3%. That, for the moment, is attractive because it’s better than the 3% or 4% you would get from some of its popular food stock peers.

But as Marc wrote earlier this month, don’t chase the fat dividend from KRFT:

“The company’s payout ratio will be 79% in 2012 and 74.4% in 2013, too high to be considered safe or likely to be raised – especially if the company’s brands don’t get revived and earnings disappoint. The payout ratio is the percentage of earnings that are paid out in dividends. I like to se a payout ratio below 75% to feel comfortable that the dividend is safe and will probably increase.

“And with corn and other commodity prices sharply higher this year due to the drought in the Midwest, Kraft’s raw materials costs should be higher, which will squeeze margins if it’s unable to pass those increases on to the consumer.”

Why Mondelez Should Be on Your Radar Going Forward

Mondelez International, on the other hand, seeks growth overseas...

Mondelez shares are trading around $28. It’s a different animal from its mature market sibling, Kraft. In my best estimation, the company should experience higher earnings growth while trading at a similar P/E ratio. Because of where they are in the business cycle, you aren’t going to get the same high dividend as KRFT.

But the following reasons are why Mondelez should be in your radar going forward:

  • Think about high growth potential. Mondelez gets 44% of its revenue from what we would categorize as emerging markets. There’s also a belief in the market that Mondelez may become a credible alternative to Coca-Cola (NYSE: KO) and Colgate (NYSE: CL) in the developing world.

  • Mondelez has 75% of its revenue tied to the fastest-growing products in packaged food such as gum, candy, chocolate and biscuits. Plus, the company will either have top or second market share in all of these categories.

  • Credit Suisse analyst Robert Moskow places an "outperform" rating and a $31 price target. He has stated that we should see “significant earnings growth” in two years with about $1.80 profit per share.

  • Joe Cornell, principal at Chicago-based Spin-Off Research, states, “Internationally, we expect developing markets to drive maximum growth for Mondelez going forward. We expect developing markets to deliver double-digit revenue growth over the long term.”

The market pundits have rendered their decision on the split. As the above evidence suggests, Mondelez seems like the stock with all the growth potential, and that’s due to the growing demand of the “sweet tooth” in both Asia and South America.

Good Investing,

Jason

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