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Sweet Tooth for Mondelez About to Decay

The decline occurred even though management increased its capital spending in that region, seeking growth. In fairness, this has been a profitable bet: Mondelez has doubled its Chinese revenue over the past couple of years. On the flip side, the disappointing results affirm my belief that the Street's growth expectations are overinflated.

The good news, though, is that Mondelez was able to offset its China weakness with an 11% growth in emerging markets -- areas that include Brazil, Russia and India. This led to a 2.5% earnings beat, which also increased 14% year over year. [Read: 5 Tech Stocks Spiking on Unusual Volume]

Now I'm not going to disparage this performance. A 14% profit increase is no small task in a highly competitive industry. But it's not the best I've ever seen, either, although that's how the stock is being priced. And let's not forget that the company is only one year removed from operating as a business segment of Kraft Foods. There's still sort of a start-up mentality at play here.

I believe the Street is betting too much that Mondelez can quickly improve upon its productivity to grow its margins. As it stands, the company still trails more mature peers like General Mills (GIS) and Hershey (HSY). In that light, it's a little puzzling that the stock is so highly valued.

For these valuations to make sense, Mondelez will require significant infrastructure builds in emerging markets, as well as upgrades in the company's production lines in established regions like the U.S. Only then will Mondelez produce the sort of margin improvement that's worth the risk. Even then it will take at least two years for that value to be realized.

Management might prove me completely wrong. They have done an exceptional job of overcoming obstacles, after all. But the current valuation presumes flawless execution against strong competition. In an industry that has given investors nothing but indigestion over the past couple of years, Mondelez's stock seems poised to turn sour.

At the time of publication, the author held 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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