In today’s report, we look at a company that is the product of a successful spinoff. In October 2012, Kraft Foods split its North American grocery business away from its global snacks business, which became Mondelez International. Both stocks did well, until Kraft was absorbed in a merger with H.J. Heinz Co. in March 2015. In the meantime, Mondelez engineered a major deal with its coffee business. It also attracted the attention of activist investor Pershing Square Capital, which now holds a 7.5% stake in the company. This helped boost the share price, and with the stock now trading at a high multiple to earnings, we view Mondelez as a growth stock that’s a worthwhile hold.
MONDELEZ INTERNATIONAL INC. (Nasdaq symbol MDLZ; www.mondelezinternational.com) makes cookies and biscuits (Oreo, Chips Ahoy, Ritz), chocolate bars (Cadbury, Toblerone), gum and candy (Trident, Chiclets) and Halls cough drops.
In July 2015, Mondelez merged its packaged coffee business with European coffee maker D.E. Master Blenders. Under the deal, Mondelez contributed its coffee brands, including Jacobs, Gevalia and Tassimo, to a new firm called Jacobs Douwe Egberts. In return, it received $4.2 billion in cash and 43.5% of the new company.
They outperform comparable stocks for years
“We can say without reservation that, in investing, spinoffs are the closest thing you can find to a sure thing. It all comes down to the incentives when companies spin off a subsidiary or division and hand out shares to their shareholders. Study after study has shown that after an initial adjustment period of a few months, spinoffs tend to outperform groups of comparable stocks for several years….” Pat McKeough shows how spinoffs and other “special situations” can create windfalls for informed investors.
If you exclude unusual items, such as a $6.9-billion gain on this sale, Mondelez earned $678 million in the three months ended September 30, 2015, down 20.1% from $849 million a year earlier. Earnings per share fell 16.0%, to $0.42 from $0.50, on fewer shares outstanding.
The sale of the coffee business cut Mondelez’s sales by 17.8%, to $6.8 billion from $8.3 billion. However, if you adjust for the sale and foreign exchange rates, sales improved 3.7%.
Growth stocks: Involvement of activist investor helps push share price up
As of September 30, 2015, Mondelez held cash of $2.0 billion. Its long-term debt of $13.0 billion is a moderate 18% of its market cap.
The company is now restructuring, including laying off workers and closing plants. These moves should cut $1.5 billion from its yearly costs by 2018.
The stock has gained 20% in the past year on news that activist investment firm Pershing Square Capital now owns 7.5% of the company. That has helped draw investor attention to Mondelez’s well-known brands and improving prospects.
However, the stock is expensive at 22.1 times the company’s projected 2016 earnings of $2.04 a share. The $0.68 dividend yields 1.5%.
We view Mondelez as a worthwhile hold.
Recommendation in Wall Street Stock Forecaster: HOLD
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