When people are worried about their finances, they’ll often shift from healthier, albeit expensive, foods to more calorie-dense and heavily processed food.
Snack food giant Mondelēz International (NASDAQ: MDLZ) recently reported a tremendously strong quarter. Its revenue grew 17% (15.8% organically) and saw volume and mix help in three of its four reporting regions. That’s a clear sign that people are still willing to pay good money for its iconic brands like Oreo, Toblerone, Cadbury, and Chips Ahoy.
In particular, the fact that it reported solid volume and mix-related performance while showing such a large revenue increase indicates that consumers accepted its pricing -- and bought its snacks anyway. As people around the world worry about inflation and a potential global recession, it’s clear that Mondelēz’ comfort food remains a popular use of people’s money.
That’s actually fairly common during tough economic times. When people are worried, natural and organic foods -- typically more expensive than highly processed ones -- tend to get deprioritized in favor of cheaper fare. That bodes well for Mondelēz, its lines of popular snack foods and candies, and its ability to maintain a solid business even if the global economy ultimately falters.
With demand clearly there, is there an investment case?
Of course, just because a company makes several product that are in demand doesn’t automatically mean that its stock is worth owning. After all, a share of stock is simply a partial ownership stake in the company, and a company is only worth what its expected future cash flows or earnings can support.
In addition to those cash flows, it’s also important to keep an eye on its balance sheet strength. If the company takes on too much risk on its balance sheet, what would otherwise be a slight stumble could turn devastating. If its shares command a price well in excess of what those cash flows can support, then even if the business thrives, its shareholders may not do so well.
Looking at Mondelēz’ balance sheet, it carries close to $22 billion in debt, but its debt to equity ratio is around 0.8. That indicates that while its business has borrowed money throughout its life, it owns assets that are worth well more than what it owes overall. That makes it likely that it will find a way to pay back its debts even if its business goes through a tough time that takes a while to recover from.
From a shareholder’s perspective, an in-control debt level is a good sign that the company has a decent chance of sticking around. This is because if it defaults -- fails to pay on its debt -- the consequences can be as bad as the company shutting down. If a company is shut down due to debt default, it is likely that the stock will be cancelled and wind up almost if not entirely worthless.
As for its earnings potential, analysts expect Mondelēz to earn around $2.94 in 2023 and $3.21 in 2024. They also expect the company to be able to grow its earnings by about 8.4% annualized over the next five or so years. When those prospects are compared with its recent market price around $73.40 per share, that prices it at around 22.9 times its anticipated 2024 earnings.
While that valuation looks a little steep looking just at Mondelēz’ anticipated growth rates, it does also reflect the pricing power it has shown and the potential it has to hold up in a tough economy. Net, for investors with a long-term focus who don’t need the fastest possible returns, Mondelēz’ is a stock that deserves a closer look.
In our latest EasyResearch feature, we have the awesome Chuck Saletta (contributor to Motley Fool) sharing some fantastic insights on Mondelēz. Just to keep you in the loop, at the time of publication, Chuck did not own shares of Mondelēz.
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