Risk-averse investors concerned about a global recession should seek out high-quality compounders that can continue to grow sales and earnings during tougher economic times.

One such name is Mondelez International (MDLZ:NASDAQ), the snacking giant with strong market positions in chocolate, sugar, and gum confectionery as well as sweet and savoury biscuits known for iconic brands including Oreo, Cadbury Dairy Milk and Ritz crackers.

While Mondelez’s products are not completely immune from the threat of downtrading, its brands are demonstrably resilient and enjoy high levels of loyalty from consumers who should continue to spend on tasty snacks that provide a bit of succour during straitened economic times.

RECIPE FOR SUCCESS

Separated from Kraft Foods a decade ago in 2012, Mondelez is one of the world’s biggest snack companies with products sold in over 150 countries. The $86.65 billion cap holds the number one global position in biscuits (cookies and crackers), is the world’s number two player in chocolate, and is also growing rapidly in the highly fragmented baked snacks market.

Arguably best known for Oreo, the world’s top selling cookie, Mondelez’s enviable portfolio of brands also includes the likes of Trident gum, belVita breakfast biscuits, Milka and Toblerone chocolate, Sour Patch Kids sweets and recently acquired brands Clif Bar and Chipita.

Guided by CEO and chairman Dirk Van de Put and finance director Luca Zaramella, Mondelez offers a play on the growing global trend of snacking.

Despite already bestriding the biscuits and chocolate worlds like a colossus, Mondelez’s brands still boast scope for growth around the globe, notably in emerging markets, with Oreo in big demand in nations such as India, for example.

A veritable free cash flow monster, Mondelez continues to return copious amounts of capital to shareholders through dividends and share buybacks, with a bumper $3.3 billion returned year-to-date.

MONDELEZ HAS MOMENTUM

Third quarter results (1 November) were better than expected, with organic growth of 12.1% coming in comfortably ahead of the 8.2% forecast, with pricing up 11.4% and volumes confounding expectation of a modest decline by coming in 0.7% higher. Raising prices without shedding volume clearly demonstrates that Mondelez has both brand strength and pricing power.

Mondelez also raised both its full year organic sales and earnings per share growth guidance to 10%-plus. And while the company faces elevated commodity and other costs, investment bank Berenberg insists the sales outlook is supported by ‘pricing, resilient volumes from robust biscuits and chocolate category demand, and improving retailer service levels in North America’.

Earnings per share growth should be underpinned by margin upside from operating leverage as the company passes on cost inflation to consumers, as well as further share buybacks and bolt-on acquisitions enabled by over $3 billion of annual free cash flow generation, which allows the company to support a high leverage ratio of three times net debt to EBITDA (earnings before interest, tax, depreciation and amortisation).

Berenberg argues the Chicago-based company is ‘one of the more reliable compounders’ in its sector. Mondelez’s 4%-plus organic growth levels, says the broker, should support a higher multiple than the current 20 times forecast earnings on which Mondelez trades for 2023, with top-quartile peers trading on 22 to 24 times earnings.

For the years to December 2023 and 2024, Berenberg forecasts a rise in earnings per share from $2.93 for 2022 to $3.12 and $3.40 respectively as sales grow from $31.3 billion in the current year to $32.5 billion next, to the best part of $33.9 billion in 2024. Twice covered by earnings, Mondelez’s dividend is estimated to rise from $1.47 this year to $1.50 next year, and $1.63 thereafter.

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