Mondelez International, Inc. (NASDAQ: MDLZ) remains a global snack food industry leader, bolstered by its portfolio of renowned brands such as Oreo, Cadbury, and Ritz. Mondelez is positioned for long-term expansion with high free cash flow generation and a strategic concentration on developing areas. But reflecting its premium status, the company now trades at a forward P/E ratio of 19.72, somewhat above the industry average. The limited upside potential at present valuation levels makes Mondelez a potential opportunity for long-term investors even although I see it as a strong long-term hold because of its operational efficiency and consistent growth possibilities. For those wishing to start a position, the present price provides a fair starting place.

Recent Performance: Resilience in a Volatile Market

Mondelez's Q2 2024 results highlight the company's resilience, even in a challenging macroeconomic environment. While overall net revenue declined by 1.9% due to unfavorable foreign currency impacts, organic net revenue grew by 2.5%, driven by higher pricing and growth in emerging markets. Adjusted earnings per share (EPS) surged by 25% to $0.86, underlining the company's strong operational management.

In line with this, Mondelez has sustained a gross profit margin of 40.5% which is still very much higher than most of the competitors companies in the consumer goods industry. The company still actively manages costs and mitigates its pricing strategies that help Mondelez to prepare for inflation and any erratic input prices for long term growth.

As seen in the chart below, Mondelez's operating revenue has consistently grown over the past few years, reflecting its resilience and growth potential. The company achieved $36.02 billion in operating revenue in 2023, a marked improvement from $31.50 billion in 2022. Looking ahead, analysts project revenues to reach $36.62 billion in 2024 and $38.30 billion in 2025.

Source: Stock Target Advisor

Valuation: A Deep Dive into Mondelez's Premium Metrics

Although Mondelez seems to be selling at a premium on the surface, a closer examination of its valuation indicators reveals that the stock is really cheap in relation to its operating efficiency and growth potential.

Mondelez's forward P/E ratio of 19.72 is slightly higher than the consumer staples average of approximately 16.5. However, this valuation is warranted given Mondelez's superior earnings growth rate. When compared to General Mills, which is at 18, Nestlé, which is a big competitor, is trading at about 24.25, and Pepsi is a little higher at about 25.7.

Here is a look at Mondelez's P/E ratio next to those of some of its main rivals, such as Nestlé, General Mills, and PepsiCo. The relative premium that Mondelez gets is shown in the chart. This shows that the company has a lot of room to grow and that its brand is strong in the snack food industry.

While the valuation gap suggests Mondelez might be modestly undervalued relative to its earnings growth, it's worth noting that the company's 3-year EPS growth rate of 15-20% significantly outpaces the broader consumer staples industry, where growth rates typically hover around 5-8%. Thus, Mondelez's P/E ratio signals its potential for consistent growth and stability, justifying its slight premium to the sector.

However, when compared to the earnings growth rate, we might find that Mondelez is slightly undervalued. The 3-year projected EPS growth rate of Mondelez is 15-20% while on the other hand, growth rate of EPS in consumer Staples industry is 5-8%. Therefore, Mondelez P/E suggests a company that will maintain rather healthy, balanced growth, and allow it a small premium to the sector.

In fact, Mondelez has a lower P/S ratio equal to 2.86 than the important peers, but higher than the average of the consumer staples sector. Pepsi has a P/S ratio of 3.2 while Nestlé has P/S ratio of 3.4 both largely due to the giant market and fast growing sales of their products. While Mondelez has a relatively small discount at the moment as it grows its revenues and becomes more entrenched in emerging markets, there is even more improvement possible.

In Q2 2024, Mondelez's organic net revenue grew by 2.5%, driven by higher pricing and strong market share in key regions. This stability in revenue, coupled with pricing power, underpins its P/S valuation. Mondelez's relatively lower P/S ratio hints at the market's expectation of future revenue growth, especially as the company capitalizes on expansion in emerging markets.

Mondelez's EV/EBITDA ratio of 14.54 is slightly above the sector average of 12-13. However, this multiple is comparable to Nestlé's EV/EBITDA ratio of 16.4, reflecting both companies' operational efficiencies. General Mills, on the other hand, trades at an EV/EBITDA of 12.8, suggesting Mondelez's premium valuation is tied to its ability to consistently convert sales into cash flow.

Below is a comparison of Mondelez's EV/EBITDA ratio against key peers like Nestlé, General Mills, and PepsiCo. This chart underscores the valuation alignment with operational efficiency among major competitors.

PepsiCo's EV/EBITDA ratio of 15.8, driven by its extensive portfolio and pricing power, highlights that Mondelez's valuation aligns closely with its well-established peers. Mondelez's strong free cash flow, projected at $3.5 billion for 2024, reinforces its leadership in operational efficiency. This cash flow allows the company flexibility to return capital to shareholders through dividends and share buybacks while reinvesting in growth initiatives.

Growth Catalysts: Emerging Markets and Innovation

Mondelez's long-term expansion is contingent upon two critical factors:

1. Innovation in Healthier Snack Options

2. Expansion into Emerging Markets

Mondelez's growth in emerging markets remains a crucial driver of its revenue. In Q2 2024, the company reported a 4.5% organic net revenue growth in Latin America and a 4.2% rise in the Asia, Middle East, and Africa region. Analysts anticipate these regions to significantly boost Mondelez's top-line growth in the coming years. The company's investment in localized product offerings, along with rising disposable incomes in these markets, positions Mondelez for sustained growth.

Emerging markets are projected to contribute approximately 35% of Mondelez's total revenue by 2025, up from around 30% in 2023. This anticipated 5% increase underscores the potential for accelerated revenue expansion driven by market-specific strategies.

On the other hand, Mondelez is not just banking on market expansion; it's also capitalizing on shifting consumer preferences toward healthier snacks. The company's increased focus on organic, gluten-free, and low-sugar offerings aligns with global trends favoring better-for-you snacks. The acquisition of Clif Bar for $2.9 billion further strengthens its positioning in the health-conscious consumer segment.

From a growth perspective, Mondelez aims to increase its share of revenue from healthier snacks to 25% by 2026, up from 15% in 2023. This strategic shift is expected to help the company achieve an annual organic revenue growth rate of 3-5% over the next three years, supporting its broader objective of expanding its market share in high-growth categories.

By leveraging its global brand strength and strategic investments, Mondelez is positioned to continue delivering revenue growth above the industry average. The combination of emerging market expansion and innovation in healthier snacks supports the company's robust growth trajectory.

Risks: Navigating Inflation and Currency Headwinds

Mondelez International faces significant risks related to inflation and currency fluctuations, which could directly impact its revenue and margins.

Mondelez's business model relies heavily on sourcing raw materials like cocoa, dairy, and wheat, whose prices have been notably volatile due to ongoing global supply chain disruptions and inflationary pressures. As these input costs rise, Mondelez faces challenges in maintaining its gross margins. Historically, the company has effectively mitigated these pressures through strategic pricing initiatives. For instance, Mondelez reported a 25% rise in adjusted earnings per share (EPS) in Q2 2024, primarily due to successful price adjustments.

However, the effectiveness of these price increases depends on consumers' willingness to absorb higher costs without switching to cheaper alternatives. Prolonged inflationary periods may pressure Mondelez to balance profitability with maintaining market share. Analysts predict that a sustained 5-6% increase in input costs could lead to a 1-2% compression in gross margins if Mondelez cannot fully pass these costs onto consumers.

Mondelez operates in over 160 countries, making it highly exposed to currency fluctuations. In Q2 2024, unfavorable currency translations reduced net revenues by approximately 1.9%. While Mondelez employs hedging strategies to mitigate currency risks, sharp and prolonged movements in key foreign exchange rates could materially impact its financial performance.

Emerging markets, which are expected to contribute around 35% of total revenue by 2025, are particularly susceptible to currency fluctuations. Currency volatility in regions like Latin America and Africa could affect the company's pricing power and reported revenues in dollar terms. Analysts estimate that a 10% depreciation in key currencies against the U.S. dollar could potentially reduce Mondelez's earnings by 2-3% annually, highlighting the importance of its currency management strategies.

Conclusion:

Mondelez International (MDLZ, Financial) is a low-risk investment with a lot of room to grow in the future. Consistent sales growth, solid cash flow generation, and operational efficiency help the company's somewhat higher value across P/E, P/S, and EV/EBITDA ratios to be justified. Particularly in developing countries, investors seeking a low-risk, consistent stock with upside potential should give Mondelez some thought as a potential stock to invest in.

The company is appealing in the current market because of its strong market situation and continuous attempts to innovate and enhance operational performance. Although the company could seem inexpensive right now, its growth potential and steady cash returns to shareholders help to justify long-term upward movement.