In an unprecedented battle between modern medicine and traditional snacks, Mondelez International, Inc. (NASDAQ: MDLZ) appears to be losing. Since a Walmart executive revealed that customers who are taking obesity drugs like Novo Nordisk blockbuster Ozempic are buying less food, the impact on Mondelez’s stock continues to be felt.
On Thursday, shares of the Oreo and Ritz maker fell to an 11-month low of $60.75. Following Friday’s bite-sized rebound, Mondelez is down more than 20% from its April 2023 record peak. Have investors overreacted?
Not all anecdotes around the ‘Ozempic effect’ have been bearish for food manufacturers. Last week, Pepsi CEO Ramon Laguarta called the impact on its business "negligible.” He cited a company shift towards healthier snacks and beverages that began long before concerns around appetite-suppressing drugs escalated. The commentary was consistent with Pepsi’s strong third quarter performance — but did little to ease market anxiety.
For Mondelez, the extent to which GLP-1 obesity and diabetes injections are hurting sales is not yet known. Management is scheduled to report third-quarter results after the market close on November 1st. Wall Street is anticipating 14% year-over-year revenue growth, which would mark a slight slowdown from Q2’s 17% growth. But considering Mondelez has consistently topped expectations for years, a surprise may very well be ‘in store.’
For now, it appears the market has gone too far in declaring Mondelez’s impressive four-year runover. Does a tiny syringe really spell doom for a snack empire whose roots go back 100 years to when it was part of Kraft Foods? Probably not.
Does Mondelez Have Good Fundamentals?
Mondelez enters the Ozempic challenge with solid underlying momentum. The company is coming off a second-quarter double beat that showed consumers have become accustomed to paying more for their favorite items. Mainstay brands like Ritz, Triscuit, Oreo, Chips Ahoy and Honey Maid, along with new portfolio additions like Clif bars, are still finding their way into shopping carts. Through the first six months of 2023, sales were up 17.5% to $17.7 billion. Both the gross margin and the operating profit margin expanded.
As far as the balance sheet, Mondelez is a mixed ‘bag.’ Its cash position is down since the end of last year to roughly $1.5 billion but so too is long-term debt, which is at $18.1 billion. While debt comprises a healthy 39% of the capital structure, continued debt reduction would improve Mondelez’s financial strength. Overall, the company appears to be in above average shape relative to peers.
After generating $1.5 billion of free cash flow in the first half, Mondelez’s ability to reward shareholders with dividends is good. In July 2023, management increased the quarterly dividend by 10% to extend its dividend hike streak to 11 years — and signal confidence in the business. A $1.70 per share annual cash payout and depressed stock price means Mondelez now has a forward yield of around 2.8% — comfortably above the 1.9% sector average.
Is Mondelez Stock Oversold?
Mondelez looks well-positioned to overcome the Ozempic threat. Its recipe for success has always been to adapt to the consumer environment by finding new ways to grow. This has included reducing fat, salt and sugar content as well as smaller package sizes.
If Ozempic users are truly buying less, promoting healthier products that better match consumption habits could help mitigate sales erosion. For the vast majority of its customers who are not on an appetite suppressant, more of the same and product innovation can help offset any losses.
Last week, Mondelez re-launched its Toblerone chocolate platform to include Tiny Toblerone shareable packs as well as premium Toblerone Truffles — something for the hungry and not-so-hungry alike.
During its most recent earnings call, management raised its full-year adjusted EPS growth guidance from 10% to 12%. Analysts have adjusted their models accordingly, and the consensus EPS estimate for 2023 is at $3.24. This means MDLZ trades at 19x this year’s earnings, which is a discount to its 22x five-year average.
In a couple of weeks, if Mondelez beats consensus (again) and offers calming comments about the Ozempic issue, investors’ appetite for chewed-up snack makers may improve.