Friday, August 7, 2015

Mondelez International (MDLZ)

Bill Ackman apparently took a humongous position in MDLZ.   The stock price popped up 5%-7% at first but went back to unchanged as the market tanked.  And today, the stock is actually down a little.
I guess it popped up on comments that Kraft-Heinz/3G would be interested in making a bid for MDLZ, and then gave up the gains when people realized that 3G might be a little too busy integrating Kraft-Heinz at the moment to be making such a big bid so soon.  Also, the trailing twelve month P/E ratio of 33.5x (according to Yahoo Finance) looks a little expensive. 

MDLZ earned an adjusted EPS of $1.75 in 2014 and is guiding double-digit growth.  So let's say they grow EPS 10% for a 2015 EPS of $1.93.   With the stock around $46/share, that's 24x current year EPS.  Not really so cheap. 

When Heinz/3G bought Kraft, they said there would be $1.5 billion in synergies.  Kraft had $18.2 billion in sales in 2014, so that's 8.2% of sales in synergies.  But since Heinz cut so much in costs, much of that is probably expected cost cuts at Kraft.  8% of sales would be in line with other 3G situations. I looked at that here: Kraft-Heinz

When 3G/BRK bought Heinz, they boosted operating margins by 7% within a year, and in that case it was an outright purchase and not merger so there weren't any 'synergies' but just pure cost cuts.   Operating margins went from 14.4% to 21.5% in a year (check out Heinz Update: Who's Next?).

The post-synergy Kraft-Heinz operating margin is over 25%.

Back to MDLZ
So, looking at it this way and going back to MDLZ, if you think 3G (or someone else) can do something similar again, the purchase price including synergies would look quite a bit different.

Adjusted operating margins are up to 14% at MDLZ.  This is around the level of operating margins of HNZ before 3G took over.

Let's say they can get this up to 22%.  MDLZ had $33.4 billion in revenues in the last 12 months.  22% of that is $7.35 billion in operating earnings.  Interest expense is $750 million (company guidance for 2015).  That's pretax profit of $6.6 billion.  Using a 22% tax rate (company guidance for 2015 is for low 20s) gets us a net profit of $5.1 billion.  1.6 billion shares outstanding gets us an EPS of $3.20.

With the stock at around $46/share, MDLZ is trading at 14.4x P/E (post-3G-like-cost-cuts).

If they can get operating margins up to 25%, then the above math would get us to $3.70 in EPS, and MDLZ would be trading at 12.4x post synergy P/E.  (25% operating margin might be a stretch, though, but I just used it because that's the post-synergy operating margin of Kraft-Heinz.)

Now, that's pretty cheap.

(The above figures don't make any adjustments for the coffee business (which now goes through equity earnings and not revenues, operating earnings etc.); it shouldn't make a huge difference to this rough analysis.)

The interesting thing here is that only 20% or so of sales (and slightly more in segment profits) is in North America.  40% of sales is in Europe.  And they have a lot of exposure to the emerging economies.  This is good and bad, of course, depending on what's going on in the world.  But it seems like the U.S. is a step or two ahead of everyone in terms of the economic cycle.  Emerging markets have been in a down-cycle for a while now, and these things eventually turn.

It is possible that if Europe and other economies are behind the U.S. in the economic cycle, that they might turn which would be very good for a company like MDLZ.

MDLZ is a much growthier name than other food companies, like, say, Kellogg, Campbell's etc.

Still, it is highly unlikely that 3G will come out with a bid very soon.   That doesn't mean MDLZ can't do pretty well on it's own for a while.  Some stability in Europe and emerging markets, continued cost-cutting etc. can make MDLZ a decent stock to own until someone is ready to really take costs out of this thing, at which point if sales are higher, MDLZ could be even more interesting to 3G or someone else who can do something similar.

At it's current price, someone like 3G would be able to 'create' an investment with some real growth potential at 12-14x P/E.



  1. Thanks and great article. I also agree that KHC/3G may acquire MDLZ but not anytime soon as they are busy digesting Kraft. 2 quick questions on the $3.70 eps and ownership structure:

    1) Does the $3.70 include the acquisition premium and interest expense from the debt raised to fund the acquisition? If not, then the 12-14x pe is too low.

    2) one of the reasons that the 3G acquisitions and cost cutting work as successfully as they do is because they are the majority owners with over 50% stake and the rest of us are minority shareholders. The KHC and QSR deals were specifically structured in a way that 3G remained as majority owners post deal and 3G made sure of that by maximizing the capital structure through debt and Berkshire preferreds. So my question is, would they even be able to acquire MDLZ in a deal structure that will keep them as majority owners? I mean, you could only raise so much debt and preferreds before you have to raise common and dilute your stake.

    Lastly, I think there's some synergy opportunities between the transition agreement that Kraft and MDLZ signed before they split in regards to managing some of their products. I forget the details but Kraft can buy back the back rights to some products that are in MDLZ's portfolio after a specified date in the future.

  2. Let's MDLZ could cut cost and get margins up to those 20% levels. That's 12-14x current earnings. Then what's a reasonable multiple to place on the business. Will it sell for 20 times then?

    1. If they can get back to growth, 20x should be easily supportable... (at least)

  3. Sorry for the confusion, I was just questioning your last paragraph about how MDLZ's current stock price allows 3G to acquire the company at 12-14x $3.70 eps. I don't think your math included the interest expense required for 3G to fund the acquisition to begin with so if you take that into consideration, eps is actually much lower than $3.70 and therefore the implied multiple is much greater than 12-14x.

    1. Good point. I didn't for this to be an LBO analysis; just to illustrate that if someone can cut costs dramatically, this is not an expensive stock.

      What 3G is doing sort of feels like the four minute mile; something that sounds really amazing, impossible etc... but as some commentators have said, they have sort of raised the bar on corporate efficiency and corporations are moving in that direction. Still, most companies that announce zero-based budgeting measures seem to be moving incrementally so I guess it can only really be done by outsiders.

      Thanks for dropping by...

  4. Given Ackman's love for platforms couldn't you flip this scenario and speculate the goal is to make Mondelez' a snack food acquisition platform? Hypothetically a little tough with their current debt levels, but actually bears a lot of similarity to Valeant in that regard.

    1. That's an interesting idea, but I doubt it especially with the current CEO who is financially incompetent. Buffett says Rosenfeld is a great operating manager but financially incompetent; she sold the frozen pizza biz for 9x pretax profit and paid 13x EBITDA for cadbury, not a good trade.

      In that sense, Mondelez is run by sort of a one-armed boxer... imagine what MDLZ could be if the CEO could use both hands effectively.

      Anyway, Buffett shot down MDLZ in the short term, but I don't think Ackman meant (if he is even thinking about it) that KHC will take out MDLZ in the near future. I think he is probably looking 2-3 years out.

      If MDLZ is now trading at 14x post-3G earnings now, imagine what it might be trading at in 2-3 years if they get revenues up.

      And since MDLZ/KHC are similar in size, it may be a stock-for-stock merger in 2-3 years. That would take care of the size problem (need to fund such a large deal).

      So once they 3G the sh*t out of KHC, they can further enhance value by merging with MDLZ and doing the same there. I haven't worked out any numbers, but Ackman probably has.

      Anyway, I don't think anything has changed with the idea despite Buffett's comment and the press saying Ackman's idea was shot down.

      Plus, I wonder about the market pricing in 3G-like margins at all the food companies. As my analysis above shows, even MDLZ is trading at 14x P/E if you assume 3G-like margins, and these things typically trade at 20+ p/e...

      Anyway, we'll see what happens.


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