MONDELEZ INTERNATIONAL INC. $25 (Nasdaq symbol MDLZ; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 1.8 billion; Market cap: $45.0 billion; Price-to-sales ratio: 0.8; Dividend yield: 2.1%; TSINetwork Rating: Above Average; www.mondelezinternational.com) is one the world’s largest snack food makers. The company’s name means “delicious world” in Latin.
Mondelez makes cookies and biscuits (Oreo, Chips Ahoy, Ritz), chocolate bars (Cadbury, Toblerone) and gum and candy (Trident Chiclets, Halls cough drops). It also makes beverages, including coffee (Tassimo) and powdered fruit drinks (Tang), as well as grocery and cheese products for markets outside North America. Cookies and biscuits account for 30% of Mondelez’s sales, followed by chocolate (27%), beverages (17%), gum and candy (16%) and grocery products (10%). It gets 44% of its sales from developing markets, 37% from Europe and 19% from North America.
Mondelez is now restructuring its operations, including shutting down less-profitable plants and sales offices. Severance and other costs will total $925 million. The company also expects to pay $150 million in expenses related to the breakup from Kraft.
Cost cuts will reduce debt
Mondelez did not say how much it expects the restructuring will save it when it is completed in 2014. However, it will probably use some these savings to cut its long-term debt of $18 billion, which is a somewhat high 40% of its market cap.
If you assume the breakup occurred a year earlier, Mondelez would have earned $658 million, or $0.37 a share, in the three months ended September 30, 2012. That’s down 2.8% from $677 million, or $0.38 a share, a year earlier. These figures disregard restructuring costs and other unusual items. Without the negative impact of foreign currency rates, earnings per share would have risen 2.6%.
Sales fell 5.1%, to $8.3 billion from $8.8 billion. That’s mainly because strong competition forced Mondelez to cut its coffee prices in Russia. Weak demand for gum in Brazil also hurt its sales. However, the company feels these are short-term setbacks. It still expects its sales to rise by 5% to 7% for all of 2012.
European recession is a risk factor
Mondelez now pays quarterly dividends of $0.13 a share. The annual rate of $0.52 yields 2.1%. The company also expects to earn $1.50 to $1.55 a share in 2012. The stock trades at 16.4 times the midpoint of that range. That’s a reasonable p/e ratio in light of Mondelez’s strong brands and high market share in developing countries. However, the recession in Europe could hurt its near-term growth.
Mondelez International is a hold.
KRAFT FOODS GROUP INC. $45 (Nasdaq symbol KRFT; Conservative Growth and Income Portfolios, Consumer sector; Shares outstanding: 592.4 million; Market cap: $26.7 billion; Price-to-sales ratio: 1.4; Dividend yield: 4.4%; TSINetwork Rating: Above Average; www.kraftfoodsgroup.com) makes a variety of grocery products, including Kraft macaroni and cheese, Oscar Mayer meats, Philadelphia cream cheese, Maxwell House coffee, Jell-O desserts and Miracle Whip salad dressing.
Sales of Kraft Foods’products are rising at a slower pace than Mondelez’s snack foods. However, its focus on stable markets like North America cuts its risk.
Like Mondelez, Kraft Foods is restructuring in the wake of the breakup. It expects this plan, which will be completed in 2014, to cost a total $650 million. The company also expects to pay $70 million in other costs related to the breakup.
Kraft Foods is off to a good start
As a stand-alone company, Kraft Foods earned $470 million, or $0.79 a share, in the three months ended September 30, 2012. That’s up 12.7% from $417 million, or $0.70 a share, a year earlier.
Gains from a hedging program that the company uses to lock in raw material prices offset restructuring costs. Kraft Foods also raised its prices and discontinued some less-profitable products. Sales rose 3.2%, to $4.6 billion from $4.5 billion. The company saw gains at all five of its businesses: Grocery Products (up 4.6%); International & Foodservice (up 4.1%); Refrigerated Meals (up 3.5%); Cheese (up 1.4%); and Beverages (up 0.1%).
Kraft Foods will probably use its steady cash flows to pay down its long-term debt of $9.6 billion, which is equal to 36% of its market cap. The company also plans to spend more on advertising its products and developing new ones.
Even with these outlays, Kraft Foods should still have plenty of cash to pay its projected quarterly dividend of $0.50 a share, for a 4.4% annualized yield. The stock also trades at a moderate 15.6 times the $2.89 a share the company should earn in 2013.
Kraft Foods Group is a buy.
