Is Mondelez International's (MDLZ) Stock A Good Investment?

We issued an updated research report on Mondelez International, Inc. (NASDAQ:MDLZ) on Aug 17, 2016.

On Apr 27, Mondelez reported mixed second-quarter 2016 results. Mondelez beat second quarter estimates for earnings, but missed the same for sales. Adjusted earnings of 44 cents per share grew 4.5% as cost savings and higher non-operating gains mitigated dilution from the coffee divesture and soft sales.

Organic revenues inched up 1.5%, less than 2.1% recorded in the last quarter owing to weak global category growth and disappointing market share performance. While emerging markets growth remained weak, sales trends slowed down fairly in North America due to aggressive trade spending by some competitors.

The macroeconomic environment remains challenging in the emerging markets. The emerging markets are experiencing softening category growth and elasticity impact from higher pricing.

Volume mix declined 0.1% in the second quarter due to elasticity impact from higher pricing, challenging category trends and increased competitive pressures.

The company reduced its organic revenue growth guidance moderately due to increasing global category challenges. Organic net revenue is estimated to increase approximately 2% in 2016 compared to previous expectations of growing at least 2%.

Notably, Mondelez’s volumes have been falling since 2014 due to volume erosion caused by significant pricing actions and category weakness because of lower demand.The company’s key category — snacks — has slowed down on account of soft global retail and consumer demand.

Mondelez, like many other U.S. food producers such as General Mills, Inc. (NYSE:GIS) , Campbell Soup Co. (NYSE:CPB) and The Kraft Heinz Co. (NASDAQ:KHC) , has struggled due to shifting consumer preference toward natural and organic ingredients over packaged and processed food. This has had an adverse effect on the top line of these companies.

Furthermore, with 80% of its sales coming from international markets, currency is a significant top-line headwind. We believe that difficult macro conditions in emerging markets will continue to weigh on category and revenue growth this year.

Despite weak sales, Mondelez’ margins have remained persistently strong backed by cost savings and productivity gains. The savings from the $3.5 billion restructuring plan is consistently enhancing margins. The program is accelerating supply chain cost savings and reducing overhead costs through layoffs, asset disposals and implementation of a zero-based budgeting system (ZBB) to neutralize commodity and currency driven inflation.

The savings from the program is also funding growth initiatives, like streamlining infrastructure and internal processes. Mondelez hired consultant firm, Accenture, to help it implement the ZBB, which has already started yielding positive results.

The re-structuring program is anticipated to generate annualized savings of at least $1.5 billion by 2018. By 2018, operating margins are expected to approach 17–18%, an improvement of 400 bps from the 2015 levels.

The savings from the program are being used to fund marketing investments and capacity expansion to accelerate the top line growth and gain market share

However, Mondelez needs to show some considerable volume improvement to attract investor attention.

Mondelez carries a Zacks Rank #3 (Hold).