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Mondelez Gains From Pricing Strategies, Input Costs a Worry

Zacks Equity Research

Mondelez International, Inc. MDLZ is a profitable pick for investors, courtesy of rising organic sales, prudent pricing and savings efforts as well as brand-building initiatives. This well-known chocolates and other snacks manufacturer gained nearly 17% in the past six months compared with the industry’s rise of 14.3%. However, rising input costs and adverse currency fluctuation impacts are some of the headwinds. Let’s take a closer look.

Factors Adding Gleam to the Stock

Mondelez’s organic sales have been rising for a while, backed by strong brands and yielding strategies. During the second quarter of 2019, balanced pricing and volume/mix propelled the company’s organic revenues to rise nearly 4.6%. Organic revenues in the quarter rose across most regions. Going ahead, management expects organic net revenues to rise more than 3% for 2019.

Speaking of strategies, prudent pricing along with productivity growth and improved volumes have been supporting gross margin performance as witnessed in the second quarter. Management continues to strike the right balance between volume and profit through disciplined pricing.

Mondelez has been undertaking some major steps to enhance savings that fuel margins and cash flow. Moreover, such savings are being invested in brand-building endeavors. We note that management is on track with savings initiatives such as zero-based budgeting. It is also on track with eliminating unnecessary costs from supply chain, such as waste reduction in the U.S. network.

Apart from these, the company is dedicated to enhance brand portfolio through acquisitions and product innovations. As part of the SnackFutures platform, the company made investments in Hu Master Holdings and Uplift Foods. Recently, it acquired minority stakes in Perfect Snacks. These investments indicate management’s efforts to boost healthy snacks offerings. In fact, the company plans to offer more good-for-you snacks and expects 50% of its product portfolio to comprise “well-being” items by 2020.

Will Growth Efforts Mitigate Headwinds?

Due to significant exposure in international markets, Mondelez‘s performance is prone to currency fluctuations. During the second quarter of 2019, adverse impacts from currency rates dented the company’s top line that inched down 0.8%.  Management anticipates currency fluctuations to negatively impact net revenue growth by nearly 3% in 2019. Currency is also likely to weigh on adjusted earnings by nearly 11 cents in 2019.

Rising raw material costs have been a hurdle to the company. Unfavorable commodity hedging exerted pressure on the company’s gross profit during the second quarter. Such headwinds are a threat to profitability, unless cushioned by adequate revenue growth.

Nevertheless, we expect this Zacks Rank #3 (Hold) company to easily tide over such hurdles given its solid brand position, effective pricing policies and other well-chalked growth endeavors.

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