Mondelez International

Mondelez posted 2.2% organic sales growth in the second quarter, reflecting a 1.5% price increase and a 0.7% benefit from higher volumes and a favorable mix. While the adjusted operating margin slipped 120 basis points to 13.1%, this followed a double-digit percentage increase in brand spending.

Why it matters: Mondelez's efforts to expand its distribution reach, invest in innovation, and shift its mix to appeal to value-conscious consumers are taking hold. Management cited that 65% of its revenue base held or gained share in the quarter, up from 40% in fiscal 2025. North America's 3.4% organic sales growth (28% of sales) was a pronounced sequential improvement from the 0.5% growth posted in the first quarter. We think this shows that Mondelez's brands remain in demand with consumers. Even as Europe (36% of sales) remains weak, with organic sales down 3.5%, this was partly due to the heatwave's impact on chocolate sales. We surmise that Mondelez is employing a playbook similar to that in the US and expect this to manifest as 3% long-term sales growth.

The bottom line: Management ticked up its full-year sales guidance to at least 2% organic growth (from flat to up 2%). As our earlier outlook was already at the high end of the range, our $75-per-share fair value estimate for wide-moat Mondelez shouldn't change much. Even after a low-single-digit after-hours uptick on July 28, we view the stock as attractive, trading 15% below our valuation. Despite inflationary pressures amid a strained consumer spending environment, we think Mondelez's brand investments should help maintain its edge.

Between the lines: To boost its standing, we forecast that Mondelez will direct around 7% of sales ($3.1 billion) to research, development, and marketing on average each year.

We posit these investments will be funded by its prudent focus on unlocking efficiencies through its upgraded ERP system, enhancements to its global supply chain, and cuts to nonworking media.

After unpacking Mondelez's second-quarter marks, we're edging up our fair value estimate for Mondelez to $77 per share, from $75, reflecting time value and our updated discount-rate framework. More specifically, we've lowered our WACC estimate to 6.8% from 6.9%.

The change does not reflect a new view of the business, but a more granular expression of our existing risk assessment. However, we see little to warrant a change to our long-term forecast for around 4% annual organic sales growth and more than 100 basis points of operating margin gains over the average between fiscal 2020 and 2024 to about 18% at the end of our explicit forecast. Our revised valuation implies a fiscal 2027 enterprise value/adjusted EBITDA of around 16 times.

In the long term, we believe emerging markets are poised for accelerating performance (relative to the tempered gains during the height of mobility restrictions when the pandemic took hold). Our belief is underpinned by the strategic playbook CEO Van de Put has implemented. For one, the firm has been increasing its spending behind its smaller, niche local brands that had previously been starved for investment (as it funneled resources to support its larger, global brands). Further, we think additional gains can be realized as Mondelez continues to empower leaders who maintain a pulse on local consumer tastes to make decisions on product innovation and distribution, thereby enhancing its agility. In this vein, management is targeting mid-single-digit long-term sales growth in its emerging market regions versus low-single-digit growth in developed markets, each of which squares with our forecast.

Beyond sales, the firm also intends to eliminate inefficiencies by reducing operational complexity (rationalizing its supplier base, parting ways with unprofitable brands, and continuing to upgrade its supply chain network and manufacturing facilities). Further, Mondelez recently announced a multiyear enterprise resource planning rollout, which should unlock additional cost savings, estimated at $1.2 billion. In addition, Mondelez also disclosed a new multiyear effort to automate additional manufacturing lines and optimize its distribution network in North America. However, the gains it targets from these efforts have yet to be quantified. Regardless, we think a portion of any savings will be reinvested in its brands, supporting the intangible assets that underpin its wide moat. As such, we forecast that research, development, and marketing will average about 7% of sales over the next 10 years (around $3 billion annually).

Cocoa costs have retreated from sky-high levels over the past few years, but the near-term benefit to Mondelez is limited because it has already locked in its cocoa needs for fiscal 2026. Still, we see prudence in diversifying supply beyond West Africa, which should blunt the impact of future wild swings. Management suggested it will continue to raise prices surgically while pursuing cost-saving initiatives, which we see as pragmatic. Against this backdrop, much apprehension remains about whether cash-constrained consumers will continue to hunger for Mondelez’s snacking and confectionery mix. However, we suspect its focus on innovation, aligned with evolving consumer trends, should blunt any persistent decline in demand.

As a leading player in global snacks, Mondelez has earned a wide economic moat resulting from its entrenched retail relationships, underpinned by the vast resources it expends to support its portfolio of well-known brands (about six of which generate more than $1 billion in sales annually). Building on the strength of its brand intangible assets, we believe Mondelez has achieved economies of scale from its expansive global network, with around 70% of revenue derived from outside its home US market.

Exemplifying its dominance in snacking, Mondelez holds the top spot in sweet biscuits (cookies), with 16% share of the worldwide segment, according to Euromonitor, trumping the low-single-digit share of privately held Ferrero, the second-largest branded operator in the segment, and private label’s low-double-digit share. In addition, Mondelez controls 19% of the global savory biscuit aisle (crackers), versus the high-single-digit levels that Mars (after its acquisition of Kellanova), Campbell's, and private labels have achieved. Further, Mondelez is a top-tier player in global confectionery, controlling about 10% of the category, lagging the 12% share held by Mars but outpacing private label’s 5%.

Although it is a leading operator, we believe Mondelez is keen to thwart the competitive angst from other national operators and small, local peers. Management has stressed the importance of empowering its local leaders to make decisions regarding product innovation, distribution, and marketing (among other facets) to effectively bring consumer-valued fare to the shelf in the local markets in which it plays. We think this has manifest in organic sales growth buoyed by both higher prices and increased volumes over time. In that context, Mondelez has posted a 5% average boost to its top line the past 10 years from higher prices, while also chalking up close to 1% volume growth, suggesting consumers are willing to pay higher prices for its indulgent fare. This has been particularly impressive over the most recent inflationary cycle, with higher prices contributing 9.6% and 13.4% in fiscal 2022 and fiscal 2023, respectively, even as volumes grew by 2.7% and 1.3%.

To support its brand standing, we forecast it will allocate around 7% of sales to research, development, and marketing over the next 10 years, totaling about $3 billion annually. This level far outpaces operators like Hormel, which directs just a low-single-digit percentage of sales (around $200 million annually) to brand reinvestments. We expect this spending will be fueled by its unwavering commitment to unlock efficiencies—centered on rationalizing suppliers, parting ways with unprofitable brands, and upgrading its supply chain network and manufacturing facilities.

But we posit Mondelez’s competitive edge stems from more than just its brand intangible assets; we also believe it enjoys a cost advantage arising from economies of scale. In our view, Mondelez benefits from a mutually beneficial relationship with retailers, serving as an important retail partner by assisting with sales strategies to maximize category volumes and profitability while prioritizing its own brands. With its vast global manufacturing and distribution network, we believe Mondelez operates with lower unit and distribution costs, greater supply chain efficiency, and a stronger ability to leverage brand spending than its smaller peers. We think this should enable it to replicate competitive products and offer this fare to retailers at a lower cost, resulting in high barriers to profitable entry.

Even with disparate disclosures, we’ve tried to hone in on direct operating costs (manufacturing and distribution) while excluding discretionary operating costs, such as advertising and R&D, noncash costs (depreciation and amortization), and nonrecurring expenses, to assess which firms are best positioned to overcome customer acquisition costs. Against this backdrop, we calculate that Mondelez touts a direct operating margin of 27%, a touch above the 25% industry median.

Despite the growing penetration of anti-obesity drugs, we don't expect demand for Mondelez’s indulgent snacking and confectionery mix to be tempered. The combination of a high out-of-pocket price, unfavorable side effects, and Mondelez's international reach (with just less than 30% of its total sales derived from North America, where trial has been the most significant thus far) should cap the potential volume hit. In addition, we posit that Mondelez’s vast resources, data, and analytics should enable it to fine-tune its portfolio to align its mix with evolving consumer trends in time, as it has to date.

Although Mondelez’s adjusted returns on invested capital excluding goodwill have consistently exceeded our 7% weighted average cost of capital estimate (averaging in the low teens through fiscal 2025), including goodwill has resulted in returns that have essentially matched our cost of capital estimate. Despite this, we think Mondelez’s mix of leading snacking fare warrants a wide economic moat. To put this in perspective, we note that General Mills has historically produced similar ROICs but competes in more secularly challenged categories, such as cereal. Conversely, Mondelez's categories face fewer competitive threats (with lower levels of private-label competition and where consumers have traditionally been willing to pay up for its branded offerings). As such, we have more confidence in Mondelez's ability to generate moat-worthy ROICs over a 20-year horizon. We forecast ROICs, including goodwill, of 11% on average over the next 10 years (approaching 20% when excluding goodwill), expanding to almost 14% by fiscal 2035.

Mondelez's strategic decision to empower in-market leaders and fuel investments in its local jewels (which has been starved in favor of investing in its global brands) should drive outsize growth in emerging markets.

We posit the firm is laser-focused on eliminating inefficiencies from its operations and will likely consider shedding noncore stock-keeping units to reduce complexity.

If cocoa costs continue to trend lower, it could offer upside to Mondelez's profit prospects beyond fiscal 2026.

North America has been in the doldrums (down 1% on an organic basis in fiscal 2025), which we attribute to a value-seeking consumer and lower retail inventory levels (though this is not a Mondelez-specific predicament).

If anti-obesity drugs become more widespread globally, Mondelez may see demand for indulgent confectionery and snacking fare wane.

Mondelez's volumes in Europe have fallen an average of 4% over the past two years following pronounced price hikes (11% on average). Volumes could remain under pressure in the region if consumers balk at proposed price increases.