First, there will be billions of new customers around the world for Mondelez, the snacks food company spun off from Kraft Foods Group, now Kraft Foods (KRFT), in October 2012, in the consumer sector...literally.
According to a recent report by McKinsey Quarterly, a publication of the global consulting firm McKinsey & Co., there will be over four billion consumers in the world by 2025 due to urbanization. The growth of urban areas results in greater economic output due to increased market efficiencies, which creates more affluent consumers. The number of those living in cities around the world is up from one billion in 1990, according to "Unlocking the Potential of Emerging Market Cities."
From these new consumers, there will be an increasing demand for the products of Mondelez, including such favorites as Chips Ahoy and Oreo cookies and Cadbury chocolates.Mondelez already derives more than 40% of its sales from emerging market nations. The company was spun off to reward shareholders with a new stock that could capitalize on the high demand for snack products from abroad. Kraft retained the sluggish North American foods divisions.
Second, with billions of new consumers, demand for items from Mondelez should continue to rise, even though sales growth has been anemic. Mondelez products are so strong that activist Nelson Peltz, who is a major shareholder, stated that coco trees in India that provide the beans for chocolate are called "Cadbury Trees." It is Peltz who provides the third reason why the share price of Mondelez should continue rising. The third-largest shareholder with 2.3% of the stock, Peltz has been moving for action to be taken to increase the price, including a call earlier this year for PespiCola (PEP) to acquire the company so the snack food operations can be combined. Speaking at a recent investor conference, Peltz stated better management could easily double the Mondelez earnings per share. Peltz noted that Hersheys (HSY) trades at 20% premium to Mondelez. If margins and sales are improved, which can be done through better "execution" according to Peltz, Mondelez, now around $33.60, should be at $70 share. Revenue for the second quarter of 2013 increased by 3.8%. That was powered by the company's two largest categories, biscuits and chocolate. For biscuits, revenue rose by 8%. There was a 6% increase for chocolates. The strongest brands, including belVita biscuits and Milka chocolates, have increased revenue at a rate more than double that for the company over the first half of 2013. Last quarter, Mondelez reported nearly $8.6 billion in sales and $35 billion for all of 2012. For 2013, Mondelez projects that organic net revenue growth will be closer to the low end of its 5% to 7% target. A better look at the performance and the potential of the company will come on Wednesday, when Mondelez reports third-quarter earnings after the closing bell. The analyst community is looking for profits of 40 cents a share for the quarter. For the second quarter, Mondelez reported earnings per share of 37 cents. Last quarter, there was a 9.5% revenue growth in emerging markets, with Brazil and Russia being particularly robust. Mondelez also reaffirmed its guidance of adjusting its earnings per share upwards to $1.60 from $1.55. Consumer firms like Mondelez should continue to do well because the sector will benefit from growth in emerging markets along with having the stability of a basic food stock. There is a 1.67% dividend for income investors, which is below average. But with a payout ratio of only 24.90% there is plenty of cash to raise it or initiate a buyback program to reward shareholders.
With Peltz on the prowl and growth around the world, there should be much to please Mondelez shareholders in the future. At the time of publication the author had no position in any of the stocks mentioned. This article was written by an independent contributor, separate from TheStreet's regular news coverage.
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