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Mondelez Stock: Very Little Margin of Safety
Stock Analysis & Ideas

Mondelez Stock: Very Little Margin of Safety

Mondelez International (MDLZ) manufactures, markets, and sells snack food and beverage products worldwide. We are neutral on the stock.

Measuring Efficiency

Mondelez needs to hold onto a lot of inventory in order to keep the business running. Therefore, the speed at which a company can move inventory and convert it into cash is very important in predicting success.

To measure its efficiency, we will use the cash conversion cycle, which shows how many days it takes to convert inventory into cash. It is calculated as follows:

CCC = Days Inventory Outstanding + Days Sales Outstanding – Days Payables Outstanding

Mondelez’s cash conversion cycle is -34, meaning the company converts inventory into cash before having to pay suppliers. Basically, Mondelez doesn’t have to put up any money to finance inventory purchases because it can move its inventory and collect the payments while still on credit. Thus, Mondelez’s suppliers are essentially financing its operations.

However, we would like to point out that the main reason for this decrease in CCC is because days payable outstanding has been trending up and days sales outstanding has decreased.

Therefore, the company hasn’t really become more efficient in terms of moving inventory. Instead, it has simply prolonged the time it takes to pay its suppliers, and shortened the time it takes to collect money from buyers.

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Nonetheless, this demonstrates that Mondelez has the bargaining power to demand favorable conditions from both its buyers and suppliers.

Dividend

For investors that like dividends, Mondelez currently has a 1.95% dividend yield which is above the sector average of 1.51%. When taking a look at its LTM free cash flow figure of $3.5 billion, its $1.8-billion dividend payment looks safe.

Taking a look at Mondelez’s historical dividend payments, we can see that its yield range has trended upwards over the past several years.

At 1.95%, the company’s dividend is near the middle of its range, implying that the stock price is trading at an almost fair value relative to the yields investors have seen in the past.

Valuation

To value Mondelez, we will use a single-stage DCF model because its free cash flows have been volatile in the past decade and therefore a little difficult to predict. In addition, it is a low-growth company.

For the terminal growth rate, we will use the 30-year U.S. Treasury yield as a proxy for expected long-term GDP growth. For the free cash flow, we used the average for the past three fiscal years to account for any potential future volatility.

Our calculation is as follows:

Fair Value = Average FCF per share / (Discount Rate – Terminal Growth)
$65.28 = $2.07 / (0.0525 – 0.0207)

As a result, we estimate that the fair value of Mondelez is approximately $65.28 under current market conditions.

Wall Street’s Take

Turning to Wall Street, Mondelez has a Strong Buy consensus rating, based on nine Buys assigned in the past three months. The average Mondelez price target of $72.22 implies 6.1% upside potential.

Conclusion

At its current price, Mondelez stock is slightly overvalued by our estimates and slightly undervalued by the analyst consensus.

Either way, we remain neutral on the stock because there isn’t much margin of safety to justify entering a position.

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