1. Processed & Packaged Goods Industry
Dan Finan, Taylor McGraw, Patrick Noonan, Mitchell Schmitt

2. Agenda Introduction & Summary Industry Overview and Assumptions
Company Assumptions & Detailed Earnings Analysis
Valuation Methodology & Valuation Calculations
Conclusion

3. Introduction & Summary
Mitchell Schmitt

4. Key Industry Players

5. Headquarters 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 contractors
Mature Company; Founded in 1866
Attempts 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

6. Headquarters in Deerfield, IL
Spun off from Kraft Foods Oct. 1, 2012 to reflect standalone global food and snack business
Done to enhance international growth for coming periods
$35.3B in revenue for 2013
Notable brands include Oreo, Cadbury, Trident, and Tang
Retail, grocery store customers
Risk factors include failed expansion, highly saturated industry, consolidation of retail customers

7. Stock Price

8. Market Information Mondelez International Nestle Current Price $76.33
$35.94
Previous Year High
$78.05
$36.05
Previous Year Low
$63.38
$28.22
% Fluctuation
18.80%
21.72%
Shares Outstanding
3.19B
1.7B
Market Cap.
$243.46B
$61.13B
P/E Ratio
$22.76
$16.44
Ent. Value
$258.20
$74.33B
Recommendation
Buy

9. Valuation Information
Nestle
Mondelez
Realized 2013 EPAT
$ ,835
$ ,485
Forecasted EPAT 2014
$ ,872
$ ,172
Forecasted EPAT 2015
$ ,168
$ ,326
NEA
$ ,046
$ ,226
Firm Value/ 2013 EPAT
27.56
11.14
Firm Value/ 2014 EPAT
24.66
9.90
Firm Value/NEA
3.08
1.22

10. Industry Overview & Assumptions
Patrick Noonan

11. Products & Markets

12. Characteristics of the Industry
Key Drivers:
Demand from supermarkets, grocery wholesalers and grocery stores
Wholesalers are the link to stores and stores are the link to consumers
High competition for in-store advertising and shelf space
World commodity prices & other input prices
Volatile commodity prices
Packaging materials
Consumer preferences & demand
Continually changing
World price of crude oil and natural gas
Product and packaging plants
Transportation costs
Consolidation 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.

13. Industry Performance
Snacking category within Processed & Packaged goods continues to grow
Growth is highly correlated to GDP growth, urbanization of population and rising discretionary income levels
Demand:
Temporary emerging market slow down in 2013 – took a toll on global growth
Expect overall growth rate expected to return to normal in 2014
Snack 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.

14. Industry Outlook
Life 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 Divestiture
Competition
Medium
Concentration
High
Life Cycle Stage
Mature
Capital Intensity
Technology Change
Regulation & Policy
Industry Assistance
Low
Source:
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.

15. Operating Conditions High levels of capital intensity
Technology and systems
Revenue volatility
Levels of regulation
Environmental regulation

16. Estimated 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.

17. Nestle Profitability Map

18. Mondelez Profitability Map

19. Company Assumptions & Detailed Earnings Analysis
Taylor McGraw

20. Company Comparison Comparing Mondelez International to Nestle
Operate in similar industries
Have similar focus on international expansion
Major products: packaged snack foods, coffee, bottled water, gum, candy
In terms of revenue, NESN is ~3x size of MDLZ

21. Company Assumptions – Growth Rate
Growth rate for packaged foods industry
Projected sales growth rate:
MDLZ: 2.5%
NESN: between 3.0% and 4.0%

22. Company 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)

23. Company 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)

24. Future 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 NESN
Accompanied by much uncertainty – could be a driver behind undervalued stock prices

25. Valuation Methodology & Calculations
Dan Finan

26. Valuation Methodology
We ultimately decided to employ the Abnormal Enterprise Income Growth Model.
Residual Income was considered
Its 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.

27. The Big Picture
Across 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.

28. Key Elements Weighted average cost of capital (WACC)
Nestle: 6.42%
Mondelez: 7.84%
Growth rate of sales
Nestle: 3.00% from , 3.50% from , 4.00% thereafter
Mondelez: 2.50%

29. Nestle Valuation

30. Mondelez Valuation

31. Recommendation for Nestle
BUY

32. Recommendation for Mondelez
BUY

33. Our 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.

34. An 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.”

35. Questions?
Processed & Packaged Goods