Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 5 Highest Dividend Yields Among Undervalued Companies for the DefensiveÂ Investor.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how Mondelez International (MDLZ)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Mondelez International, Inc. (Mondelez International) is a snack manufacturing company. The Company manufactures and markets food and beverage products for consumers in approximately 165 countries globally. The Company’s portfolio includes nine brands including Oreo, Nabisco and LU biscuits; Milka, Cadbury Dairy Milk and Cadbury chocolates; Trident gum; Jacobs coffee; and Tang powdered beverage. The Companyâ€™s portfolio of snack foods and refreshments also includes 53 brands. The Company operates in five segments: Latin America, Asia Pacific, Eastern Europe, Middle East and Africa, Europe and North America. The Company has operations in more than 80 countries and sells its products in approximately 165 countries. On February 22, 2013, it acquired the remaining interest in a biscuit operation in Morocco, which is a wholly owned subsidiary within its EEMEA segment.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years -Â PASS
- Dividend Record – has paid a dividend for at least 10 straight years – PASS
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
- Moderate PEmg ratio – PEmg is less than 20 -Â FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 -Â FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend -Â PASS
- Earnings growth – EPSmg greater than 5 years ago -Â FAIL
|Value Based on 3% Growth||$20.84|
|Value Based on 0% Growth||$12.22|
|Market Implied Growth Rate||8.70%|
|Net Current Asset Value (NCAV)||-$16.28|
Balance Sheet – 3/31/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Mondelez is not suitable for either the Defensive Investor or the Enterprising Investor. Â The Defensive Investor has major concerns with the low current ratio, the lack of sufficient earnings growth over the last ten years, and the poor PEmg and PB ratios. Â The Enterprising Investor also has concerns with the level of debt relative to the current assets and the lack of earnings growth over the last five years. Â As a result, value investors followingÂ the ModernGraham approach based on Benjamin Graham’s methods should exploreÂ other opportunities through a review of ModernGraham’s valuation of Pepsico (PEP) and ModernGraham’s valuation of General Mills (GIS). Â From a valuation side of things, the company appears to be overvalued after seeing its EPSmg (normalized earnings) drop from $1.60 in 2010 to an estimated $1.44 for 2014. Â This demonstrated drop in earnings does not support the market’s implied estimate of 8.70% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s formula, to return an estimate of intrinsic value belowÂ the market price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Mondelez International (MDLZ)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
Disclaimer: Â The author did not hold a position in Mondelez International (MDLZ)Â orÂ in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Â Logo taken from wikipedia; this article is not affiliated with the company in any manner.