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Is MDLZ overvalued, or is there still room to run?

In 2019, one of the most interesting sectors in the entire market is the Consumer Staples sector. I tend to think of stocks in this sector, which include Food, Personal Care, and big-box retailers and grocers, as being defensive in nature, useful as a way to keep your money working for you in uncertain market conditions. This year the sector has stood out from the rest of the market; even as the S&P 500 has increased since the beginning of the year about 16%, the Consumer Staples sector, as measured by the S&P 500 Consumer Staples Sector SPDR ETF (XLP) has gone up a little over 20%. The sector has been driven by big performers like J.M. Smucker (SJM), Walmart (WMT), and Proctor & Gamble (PG).

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I’ve spent quite a bit of time since last year evaluating stocks in this sector, and one of the interesting questions I see a lot of these companies grappling with is how to deal with shifting consumer trends and preferences. It’s something a lot of analysts attribute to the coming-of-age of Millennials, who are reaching adulthood and becoming a more significant consumer demographic. Millennial or no, a lot of traditional, established Food stocks have been impacted by the fact that consumers have been gravitating to organic healthier food choices. That has forced a lot of companies to find ways to adapt their business models.

Mondelez International Inc. (MDLZ) is an interesting case study. This is a snack company that produces familiar brands like Nabisco, Oreo, Cadbury and Toblerone. These aren’t brands that you’d automatically associate with “healthy” eating, but MDLZ is one of the best-performing stocks in the Food industry and the Consumer Staples sector, increasing more than 36.5% year to date. With a strong fundamental base to work from, I think MDLZ is a good example of what can happen when management really understands their core business and how to evolve their business while staying faithful to what has been working for years.

The flip side of such big performance in the first half of the year, of course, is that at some point a stock’s price becomes so highly inflated that it gets harder and harder to justify taking a long-term position. Has MDLZ reached that point, or is there still room for more and bigger things to come? Let’s take a look.

Fundamental and Value Profile

Mondelez International, Inc. is a snack company. The Company manufactures and markets snack food and beverage products for consumers. It operates through four segments: Latin America, Asia, Middle East, and Africa (AMEA), Europe and North America. As of December 31, 2016, its brands spanned five product categories: Biscuits (including cookies, crackers and salted snacks); Chocolate; Gum and candy; Beverages (including coffee and powdered beverages), and Cheese and grocery. Itsportfolio includes various snack brands, including Nabisco, Oreo, LU and belVita biscuits; Cadbury, Milka, Cadbury Dairy Milk and Toblerone chocolate; Trident gum; Halls candy, and Tang powdered beverages. The Company sells its products to supermarket chains, wholesalers, supercenters, club stores, mass merchandisers, distributors, convenience stores, gasoline stations, drug stores, value stores and retail food outlets. As of December 31, 2016, it sold its products to consumers in approximately 165 countries. MDLZ’s current market cap is $78.7 billion.

Earnings and Sales Growth: Over the last twelve months, earnings increased almost 5%, while sales declined a little more than -3%. In the last quarter, earnings increased 3%, and sales declining almost -3.5%. These numbers are reflective of a pattern that is pretty common for most Food industry stocks right now. MDLZ operates with a better margin profile than most Food stocks; over the last twelve months, Net Income was 12.6% of Revenues, and improved somewhat in the last quarter to about 13.9%.

Free Cash Flow: MDLZ’s free cash flow is healthy but modest, at a little over $3.3 billion for the trailing twelve month period; that translates to a Free Cash Flow yield of about 4.26%.

Debt to Equity: MDLZ has a debt/equity ratio of .50, a relatively low number that looks good, but is also misleading. MDLZ’ balance sheet shows a little over $1.5 billion cash and liquid assets against $12.9 billion in long-term debt. High leverage isn’t uncommon in the Food industry, and the company’s operating margins indicate servicing their debt isn’t a problem; but the fact is that liquidity could be a concern moving forward.

Dividend: MDLZ pays an annual dividend of $1.04 per share, which translates to a yield of 1.9% at the stock’s current price.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for MDLZ is $17.94 per share and translates to a Price/Book ratio of 3.04 at the stock’s current price. Their historical Price/Book average is 2.32, which suggests that the stock is actually about -24% overvalued and puts the stock’s “fair value at around $41 per share. Their Price/Cash Flow ratio offers a more optimistic perspective, since it is currently running about 15.5% below its historical averages. That ratio puts a long-term target price at about $63 per share.

Technical Profile

Here’s a look at the stock’s latest technical chart.

Current Price Action/Trends and Pivots: The chart above displays the stock’s upward trend from from the beginning of the year. The stock’s trend is easy to see, and it’s broken above near-term resistance at about $53  in the last week to set a new yearly high. That’s good for investors that have been holding the stock through this trend, and that bullish momentum does imply the trend should continue. Identifying the stock’s next most likely resistance level at this stage is really nothing more than guesswork since this also represents a new all-time high. If you use the last break above resistance, which was at around $48 in mid-March to its next resistance about $52 in May, that gives you about $4 per share to work with. That puts the next potential resistance point at around $57 per share in the near-term. $52, in the meantime should act as the newest support level.

Near-term Keys: It’s hard to say which way to look for a short-term trade right now on MDLZ; if you didn’t get in on the stock’s upward trend earlier this year, seeing about $2.50 per share of near-term upside just isn’t all that compelling when support is about the same distance away from the stock’s current price. That said, a new push above $57 could work as a signal to think about buying the stock or working with call options. Another, perhaps more interesting set up from a bullish standpoint could come if the stock retraces back to about $52, tests support, and then pivots back to the upside from that point. A bearish signal would come from a push below the newest expected support level at $52, which could provide an opportunity to short the stock or start working with put options. What about value? That’s a bit of mixed bag right now, which means that whether the stock has more fundamentally-driven upside really depends on your own individual perspective. Beauty is often found in the eyes of the beholder; for my perspective, I would prefer to see the company’s liquidity improve a bit more, with a smaller total level of debt. The fact that Price/Book and Price/Cash Flow provide contrasting forecasts is also a negative in my view, which means that I would prefer to wait to see them both point in a positive direction before I would consider the stock’s value proposition to actually be useful.lef

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