Mondelez International Inc. (NASDAQ:MDLZ) is a promising choice for value investors. The management is implementing strategies to foster growth, resulting in favorable outcomes for shareholders. Furthermore, the company has substantial potential for expansion in emerging markets, as well as through e-commerce and innovative solutions.

The business did a good job of diversifying its revenue-generating sources. Europe accounts for 36% of the company’s revenue, followed by North America (31%), Latin America accounted for 12% of the business’s sales, while the AMAE area contributed 21%.

Mondelez generates almost a third of its revenues from the biscuit segment. The industry is expected to grow at 5.81% CAGR until 2027. The growth of the industry is supported by various factors, such as the popularity of healthy snacking and the convenience of innovative packaging. Market players are investing in product innovation and development due to the recognition of increasing health awareness, which is contributing to the expansion of their product portfolio and the market’s growth. Moreover, emerging economies’ consumers are willing to try out healthier options and regional flavors, which biscuit market players are capturing by including natural ingredients and sharing nutritional information.

The chocolate segment accounts for 30% of the company’s revenue and is the second-largest source of revenue. The industry is expected to record 4.5% CAGR until 2027. The growth of the chocolate market is being driven by several factors, including the increasing demand for high-quality and premium chocolate products. Consumers are willing to pay more for chocolate products that offer unique packaging, flavors, and textures. In addition, the rising popularity of dark chocolate, which is considered a premium and indulgent product due to its perceived health benefits from its high cocoa content, is also contributing to the market’s growth.

Mondelez was able to generate 4% revenue CAGR during the last 5-year period. Strong brand portfolio, creative solutions, expansion into emerging markets, and growth in e-commerce are primarily contributing factors.

One of the most significant business growth engines is emerging markets. Almost one-third of revenues come from emerging regions, which recorded an 11% growth in revenue in 2022. The product localization strategy is prioritized by the management in emerging countries in order to provide goods that are tailored to the distinct tastes and preferences of local consumers. A successful example is the launch of Oreo mooncakes in China in 2013, where they were well accepted for their distinctive flavor and marketing efforts. To appeal to Chinese tastes, the business started to offer flavors like green tea and matcha. Also, the business worked with regional partners to create unique packaging solutions. As a result, Oreo mooncakes substantially boosted brand reputation. The product has been accepted by customers as a symbol of the Mid-Autumn Festival tradition, which increased brand awareness and generated increasing sales in the region.

In order to produce goods locally, Mondelez has built new production facilities in developing economies. These facilities are mainly intended to manufacture products that are more in line with regional consumers’ preferences. To fulfill the rising demand for its products in China, the firm announced plans to invest $100 million in the construction of a new facility in 2019. The facility is intended to make biscuits and snacks and is expected to contribute to the company’s growth in Asia. To strengthen its presence in China, the company partners with Alibaba Group (BABA). The cooperation brings substantial benefits to the company as it uses Alibaba’s expertise in data analytics and digital marketing. Data analytics is being used to learn more about consumer trends and preferences, which helps with product development and marketing plans.

The iconic Cadbury Dairy Milk chocolate brand is planned to be produced at the new production facility that Mondelez intends to develop in India for $190 million. Due to the management’s ability to adapt its products to the unique tastes of Indian consumers, the product had significant success in the country. Brazil will be another big investment destination for the company. A new production line for the Lacta chocolate brand will be built in the country. The management intends to invest $200 million for facility development.

To cater to the growing demand for e-commerce and mobile shopping, Mondelez International has launched a mobile-first e-commerce platform. The rise of smartphones has led to an increase in consumers using their mobile devices to shop online, and Mondelez International recognized this trend and responded by providing a mobile-first platform. The platform’s key feature is its personalized shopping experience. It uses data analytics and machine learning algorithms to offer personalized recommendations to each user.

The management prioritizes the need to invest heavily in innovative solutions. Thus the company established SnackFutures – its innovation and venture hub. The main aim of this project is to drive innovation and create new prospects in the snacking industry. The hub is focused on identifying and nurturing emerging brands and technologies that have the potential to transform the snacking industry. The company allocated $100 million to the project, which aims to invest in and collaborate with startups and entrepreneurs who have innovative ideas that can promote growth and generate value in the snacking industry. Generally the SnackFutures has 3 main pillars: invention, reinvention and venture. The invention pillar is aimed at developing new products to satisfy emerging consumer preferences. The reinvention component is centered on changing Mondelez International’s current brands and products by utilizing modern technologies. The third – venture pillar is intended to invest in startups that have inventive ideas that can promote growth.

Risks

The biggest risk the business faces is connected with stiff competition in the industry. Large behemoth-competitors which possess enormous cash flow generating capacity can invest heavily to develop innovative solutions and capture market share from the market.

The operations of Mondelez, which sources ingredients and raw materials from suppliers worldwide, could be impacted by disruptions in the supply chain. Such disruptions may be caused by factors such as transportation interruptions or trade disputes.

Valuation

To calculate the stock value we have conducted a DCF analysis. For upcoming 5-year period we anticipate industry average growth rate of 5.2% (5.81% and 4.5%). After that we apply a terminal growth rate of 2%. For EBITDA margin we adopt peers’ average of 19.4% which is in line with historical margin of 19.3%. For Capex margin we have taken peers’ average of 4.1% which is more conservative than the company’s historic margin of 3.5%.

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For WACC calculation we have used beta of 0.55, equity risk premium of 5.94% and risk-free rate of 4%.

Building the model we got an intrinsic value of $91.1 which indicates that the stock is 40% undervalued.

Dividends

Besides attractive valuation, the company also offers stable dividends. During the last 5-year period the company managed to increase dividends at 12.38% CAGR, as currently the yield stands at 2.36% level. The payout ratio seems to be in a safe territory as dividends to FCF ratio is below 70% level.

Conclusion

Mondelez International business is well diversified and is able to withstand potential economic fluctuations. The management is actively investing to discover new growth opportunities. MDLZ stock seems significantly undervalued, which is why we assign a Buy rating to the stock with a $91 price target.