One percentage point of operating margin for Mondelez is roughly a third of a billion dollars. Relatively speaking, that’s not a huge amount: If the entire sum went to marketing budget, it would increase total annual SG&A, or sales, general, and administrative spending, by about 4%. The company could fund this by forgoing some of the excess $1 billion in cash flow it expects to generate over the next two years. Management has signaled that a portion of the projected cash flow excess may be used to increase the current dividend modestly, or to buy back shares to reduce dilution from recent equity compensation. These ideas don’t seem very bold; in fact, they seem almost a holdover from the legacy Kraft business. To be fair, Mondelez is increasing its capital expenditure, or capex, as a percentage of net revenue, from its current 3.8% to a long-term target of 5%. Part of the capex will be allocated to bringing new plants online in developing markets including India, China, and Brazil.
If Mondelez continues to shine in the area of operating margin while simply meeting the low end of the expected revenue range, its strategy will rightly be challenged, especially when competitors such as Unilever and Nestle have demonstrated recently how to exploit great brands for top-line improvement. Unilever grew its sales 10.5% last year, from 46.5 billion euros to 51.3 billion euros, with organic growth coming in at almost 7%. Similarly, Nestle stretched its sales from 83.6 billion swiss francs to 92.0 billion swiss francs, a 10.2% gain, of which nearly 6% was attributed to organic growth. Both companies are considerably larger than Mondelez, and they’re growing faster.
Mondelez International Inc (NASDAQ:MDLZ) has already taken outsize risks in spinning off Kraft and gunning for developing markets. While the company works hard to build a desire for its products around the world, its shareholders may be jonesing for a little less caution on the execution side in the coming quarters. If you’re considering investing in Mondelez, keep your eyes on the organic revenue growth number in the near term, and more important, watch management’s approach to it.
The article Mondelez: Could More Risk Lead to Greatness? originally appeared on Fool.com.
Fool contributor Asit Sharma has no position in any stocks mentioned. The Motley Fool recommends Unilever.
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