Mondelez International: Despite The Declining Margins, We Believe The Valuation Is Attractive

Core Viewpoint - Mondelez International, Inc. has shown strong financial performance and attractive shareholder returns, leading to an upgrade in investment rating from neutral to buy [2][32]. Financial Performance - In Q2, Mondelez reported revenues of $8.34 billion, missing analyst expectations by $110.56 million and reflecting a year-over-year decline of approximately 2% [33]. - Despite the revenue decline, organic net revenue increased by about 2.5%, driven by strong pricing actions of 4.7%, partially offset by a decrease in volume/mix of -2.2% [37]. - The company achieved an EPS of $0.86, exceeding initial expectations [33]. Shareholder Returns - Mondelez has a strong history of returning value to shareholders, with 22 consecutive years of dividend payments and a recent announcement of an 11% increase in dividends per share [8][11]. - The company has returned significant amounts to shareholders through share buybacks, which, if considered as dividends, would imply an annual payout of approximately $3.48 per share [17]. Valuation - Using a dividend discount model, the fair value estimate for Mondelez's stock is $68 per share, slightly below the current share price of $70, not accounting for the positive impacts of share buybacks [16]. - The stock is trading at a premium compared to the sector median but is selling at a discount compared to its historical valuation figures [27][28]. Profitability and Margins - The gross margin has decreased by 590 basis points, and the operating margin has declined by 660 basis points, attributed to various one-off factors including currency and commodity hedging losses and higher integration costs [42]. - Despite the margin pressures, the company generated strong cash flow, sufficient to support dividends and share buybacks [43]. Market Performance - Emerging markets have shown larger growth compared to developed markets, contributing positively to the overall financial results [39]. - The company anticipates that potential decreases in interest rates may boost consumer confidence and demand for discretionary products, benefiting future sales [41].