Be a Bidder or a Target to Be: Who Is Mondelez?

You might be eating Oreos when reading this article, do you know who Mondelez is?

The word “recession” is being thrown around a lot these days. As history sees it, we are due for another one any day now.

So what do we do? Many seasoned investors will tell you to go into utilities or tobacco, defensive stocks that have proven themselves in previous downturns.

You want to know what is truly recession-proof?  Oreos. With that in mind, you’d be wise to take a look at Mondelez International.

Mondelez International Inc. (NYSE: MDLZ) is an American multinational beverage, confectionary, and snack company. They own eight brands worth over $1 billion. These brands include the likes of Nabisco, Cadbury, Trident, and Tang. On top of that, they own 44 other reputable brands including Chips Ahoy, Ritz, and Sour Patch Kids.

All together, these power brands bring in 70% of the company’s revenue. This is promising with regards to their product portfolio, as many of their brands are over 100 years old. They have a foothold on the market and the highest levels of customer loyalty to their successful and delicious brands.

But that’s the real kicker when it comes to Mondelez. They have the uncanny ability to build their brands into something big based on what the customers want. Take Enjoy Life Foods as an example. Mondelez bought out Enjoy Life Foods in February of 2015. Along with adding successful brands to its already impressive portfolio, this was a very strategic move for Mondelez.

Enjoy Life Foods is best known for its “free-from” style. That’s a fancy way of saying their products are made without dairy, eggs, fish, peanuts, tree nuts, shellfish, soy, and wheat. These are the eight most common allergens and account for 90% of all food allergies.

In the past few years, consumers have begun demanding healthier options. The “free-from” segment of the snack foods industry brings in over $12 billion per year. This acquisition made Mondelez a powerful player in this sector and the ability to offer popular allergen-free and portion-control products. Management has stated plans to bring their “Better Choices” segment up to 25% of the company’s total revenue.

But besides acquisitions, Mondelez has other plans for growth.

Let’s begin with their margins. Since 2013, Mondelez has expanded margins by more than 450 basis points. This has been done by aggressively cutting costs wherever possible. In 2015, the company moved to a newer and more efficient manufacturing facility in Mexico. They also cut back on first-class flights for its employees.

All of these cost-cutting initiatives have resulted in adjusted EPS growth of over 17% per year. Riding this wave of momentum, management continues to raise their targets for operating income margins to 15-16% in 2016 and 17-18% in 2018.

The effects that these cost reductions have had on free cash flow are absolutely remarkable. Along with expanding margins, decreasing restructuring costs, strong working capital, and fewer capital expenditures, free cash flow is set to come in around $1.4 billion this year. Even more remarkable, the company plans on doubling this figure by 2018.

Another effort of Mondelez worth noting is its increase in productivity. After shuffling around their supply chain and reducing the number of their suppliers, the company’s cash conversion cycle has fallen from 33 days in 2012 to minus 7 as of 3Q16. Management’s target is minus 20 days by 2018.

All of this is great, but of course, we have to save the best for last.

A buyout offer for Mondelez isn’t out of the question.

In 2012, Mondelez separated from Kraft and became the larger, international portion of the two. In 2015, Kraft merged with Heinz creating one of the largest packaged goods companies in the world. A Mondelez acquisition would further strengthen Kraft-Heinz on a global scale. Plus Kraft-Heinz has the size and the means to make that deal happen.

PepsiCo is another buyer we’re looking at.  Activist investor Nelson Peltz tried to get the two giants to merge a few years ago, arguing that the more profitable snack business was being drug down by the less successful beverage business. This still makes sense today, especially when considering the shift in consumer preferences to healthier food choices.

Another potential buyer is General Mills. The king of cereal has been actively trying to grow its presence in the snack food industry. In recent years, it has acquired Annie’s, an organic foods company, and Epic Provisions, an upscale meat snacks manufacturer. This movement into healthier options as well as a diversification of its portfolio makes the idea of a merger sound very reasonable.

Even without a buyout offer, Mondelez is a company to keep your eye on in 2017. Management’s efforts to increase dividend payouts are an added bonus. Using two different dividend discount models, we project a fair value of $65.

So all in all, Mondelez is a growing company, offers a dividend yield of nearly 2%, and has a 40% upside by our count.

So amid all of this talk of an impending recession, padding your portfolio with Oreos and Ritz crackers might not be as silly as it sounds.

On early December, MDLZ shares have soured more than 10%, amid the rumor that Kraft Heinz may be interested to buy the company.