Being a value-oriented investor means that the general mindset around a stock’s historical trading ranges is a bit different than what most investors, who tend to focus primarily on growth, tend to pay attention to. Value means looking for stocks trading at a nice price, and that usually means that stocks trading at or near historical lows often offer the best bargain proposition. Growth investors, on the other hand, tend to focus on stocks that have clear upward trends – and that includes stocks that are near their all-time highs. In fact, stocks that have recently pushed to new highs are stocks these kinds of investors will usually buy into enthusiastically.
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 34% over the past year. The stock’s latest earnings report earlier this week gave the market even more reason to like the stock, pushing it about 5% higher in a single day. 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 stock is a good example of what happens when investors get on board, too.
The flip side of such big performance, 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 $83.3 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased 3.23%, while sales were flat but rose by 1%. In the last quarter, earnings increased 12%, with sales rising almost 5%. MDLZ operates with a better margin profile than most Food stocks; over the last twelve months, Net Income was 14.8% of Revenues, and narrowed only slightly in the last quarter to about 13.1%.
Free Cash Flow: MDLZ’s free cash flow is healthy but modest, at $3 billion for the trailing twelve month period; that translates to a Free Cash Flow yield of about 3.81%.
Debt to Equity: MDLZ has a debt/equity ratio of .48, 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 $14.6 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 $1.14 per share, which translates to a yield of 1.94% 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 $18.65 per share and translates to a Price/Book ratio of 3.15 at the stock’s current price. Their historical Price/Book average is 2.5, which suggests that the stock is actually about -20.5% overvalued and puts the stock’s “fair value at around $47 per share. Their Price/Cash Flow ratio offers a more optimistic perspective, since it is currently running about 15% below its historical averages. That ratio puts a long-term target price at about $67 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 over the past two years. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. For the last six months of 2019, the stock was mostly range-bound at the top of its trend, and retraced it a bit in November to support at around $51 per share. Bullish momentum in the last month pushed the stock back to resistance around $56, with the stock breaking above that level in the last two days. That puts immediate support back at the resistance break, at around $56. Resistance is a bit harder to see given that the stock is now at an all-time high; but if the stock can continue to push higher, Fibonacci trend extension analysis suggests the stock’s next resistance could be anywhere between $62.50 and $64.50 per share.
Near-term Keys: MDLZ’s recent break above resistance could give the stock some good momentum to keep driving higher; look for a buying signal with the stock, or with call options if the stock can push above the high it set yesterday at about $58, with a short-term target at around $62.50 per share. If the stock’s momentum breaks down, a push below the 38.2% retracement line at $51 could offer an interesting opportunity to short the stock or work with put options, with a target at around $47.50 where the 50% retracement line sits. What about value? MDLZ’s fundamentals are strong, and appear to be improving, so there is an argument to make about the stock on a growth-focused basis. While my normal valuation metrics don’t point to compelling value, the stock is also more than 50% the industry average Price/Book ratio, which could indicate the stock could still offer interesting value.