5Headquarters in Vevey, Switzerland (IFRS) Recorded 92.15B in Revenues for 2013; Most in U.S.Product Lines include powdered and liquid beverages, water, dairy products, nutrition, etc.Main customers are wholesalers, grocery stores, and food service contractorsMature Company; Founded in 1866Attempts to gain economies of scale once established (Current expansion in emerging markets)Risk factors include commodity pricing, increased regulation in countries they operate, and consumer preferences
6Headquarters in Deerfield, IL Spun off from Kraft Foods Oct. 1, 2012 to reflect standalone global food and snack businessDone to enhance international growth for coming periods$35.3B in revenue for 2013Notable brands include Oreo, Cadbury, Trident, and TangRetail, grocery store customersRisk factors include failed expansion, highly saturated industry, consolidation of retail customers
8Market Information Mondelez International Nestle Current Price $76.33 $35.94Previous Year High$78.05$36.05Previous Year Low$63.38$28.22% Fluctuation18.80%21.72%Shares Outstanding3.19B1.7BMarket Cap.$243.46B$61.13BP/E Ratio$22.76$16.44Ent. Value$258.20$74.33BRecommendationBuy
12Characteristics of the Industry Key Drivers:Demand from supermarkets, grocery wholesalers and grocery storesWholesalers are the link to stores and stores are the link to consumersHigh competition for in-store advertising and shelf spaceWorld commodity prices & other input pricesVolatile commodity pricesPackaging materialsConsumer preferences & demandContinually changingWorld price of crude oil and natural gasProduct and packaging plantsTransportation costsConsolidation of retail customers creates larger retailers with increased influence in the marketplace. Many of the industry’s retail customers such as supermarkets and food distributors continue to consolidate, decreasing number of customers. Large retail customers can resist price increases and demand lower pricing. Larger retailers have scale to develop supply chains that allow them to operate with reduced inventories.Must distinguish among short-term fads, mid-term trends and long-term changes in consumer preferences. Recently, consumers have increasingly focused on health and wellness, including weight management and reducing sodium consumption.As commodities become constrained, prices may rise sharply. Some key commodities that our industry is reliant on include sugar, coffee, cocoa, wheat, corn products, soybean and vegetable oils, and dairy.
13Industry PerformanceSnacking category within Processed & Packaged goods continues to growGrowth is highly correlated to GDP growth, urbanization of population and rising discretionary income levelsDemand:Temporary emerging market slow down in 2013 – took a toll on global growthExpect overall growth rate expected to return to normal in 2014Snack food consumption is highly correlated to GDP growth, urbanization of the population and rising discretionary income levels associated with a growing middle class. Over the long-term, we expect these trends to continue leading to growth in key consumer behaviors including increased snacking occasions, greater use of convenience food and migrating to more frequent, smaller meals.
14Industry OutlookLife Cycle – Industry is mature, characterized by saturated domestic markets and well- established brands.Weak dollar against the currencies of major trading partners will boost industry exports.Growing global middle class.Mondelez DivestitureCompetitionMediumConcentrationHighLife Cycle StageMatureCapital IntensityTechnology ChangeRegulation & PolicyIndustry AssistanceLowSource:Industry leaders compete primarily on the basis of product quality, brand recognition, brand loyalty, service, marketing, advertising and price.Divestiture - it will create a global snacks business with revenue of $32 billion, containing such brands as Oreo cookies, Trident gum and Cadbury chocolates. It will also create a North American grocery business with revenue of $16 billion, including such brands as Jell-O desserts, Oscar Mayer processed meats and Kraft macaroni and cheese.There are big threats facing potential new entrants to the industry. Specifically, the extremely well fixed position of the industry’s major players. These major players have high customer and brand loyalty and have the resources necessary to invest in advertising and promotions needed to secure and improve market share.The major players also experience favorable contracts with key suppliers. New entrants will have trouble attaining the same inputs for the same low prices. Additionally, new entrants will not have the established distribution channels in place that more mature firms already operate.Overall, there is little threat from new entrants into the processed and packaged good industry.
15Operating Conditions High levels of capital intensity Technology and systemsRevenue volatilityLevels of regulationEnvironmental regulation
16Estimated Revenue Growth Long run future growth of the industry and the member companies are expected to converge to the growth in the macro economy by 2019– this is due to market saturation and the mature industry as a whole.
19Company Assumptions & Detailed Earnings Analysis Taylor McGraw
20Company Comparison Comparing Mondelez International to Nestle Operate in similar industriesHave similar focus on international expansionMajor products: packaged snack foods, coffee, bottled water, gum, candyIn terms of revenue, NESN is ~3x size of MDLZ
21Company Assumptions – Growth Rate Growth rate for packaged foods industryProjected sales growth rate:MDLZ: 2.5%NESN: between 3.0% and 4.0%
22Company Assumptions – EPM MDLZ EPM for 2014, onward: 13.64% (projected increase from 2013 EPM of 2.5%)NSN EPM for 2014, onward: 10.40% (average of EPM)
23Company Assumptions – EATO MDLZ EATO for 2014, onward: 0.70 (2013 EATO)NESN EATO for 2014, onward: 1.00 (increase from 2013 EATO of 0.13)
24Future Earnings Uncertainty Both of the companies and their competitors are likely to pursue acquisitions in the future as they seek to aggressively expand into emerging markets.Projected to be a large source of growth for MDLZ and NESNAccompanied by much uncertainty – could be a driver behind undervalued stock prices
26Valuation Methodology We ultimately decided to employ the Abnormal Enterprise Income Growth Model.Residual Income was consideredIts reliance on NEA works well with the future growth strategies of Nestle and Mondelez…but the AEIG Model primarily uses forecasts within our designated time horizon to derive total estimated value, and thus provides us with the most confidence.
27The Big PictureAcross the industry, domestic sales are saturated and stagnant, but emerging markets are on the verge of a boom.Both companies plan to pursue an aggressive acquisition strategy in these emerging markets to capture significant market share.At the moment, Mondelez’s recent spin-off hinders its growth rate.
28Key Elements Weighted average cost of capital (WACC) Nestle: 6.42%Mondelez: 7.84%Growth rate of salesNestle: 3.00% from , 3.50% from , 4.00% thereafterMondelez: 2.50%
33Our Thoughts Both Nestle and Mondelez are undervalued. Growth in emerging markets remains highly uncertain……but from our perspective, population growth and the emerging middle class will create a great deal of value for both companies.
34An Earnings Call Excerpt… Paul Bulcke, Nestle CEO:“The macro-environment in 2013 was one of soft growth, minimal in the developed world and below recent levels in the emerging markets. Our response was to increase brand support, accelerate innovation, and to ensure our pricing was sensitive to consumer needs.”Despite this nominal growth…“The emerging markets had an organic growth of 9.3%, now representing 44% of the group's sales.”