Nomura: Mondelez's Margin Target At Risk, Sees Upside In Coke

The going for Mondelez International Inc MDLZ in 2016 may not be as sweet as it seems, as the Oreo cookies maker may find it tough to achieve its 2016 margin target. On the other hand, there could be additional upside to the shares of The Coca-Cola Co KO.

Mondelez, which is popular for its Cadbury and Milka chocolate brands, is hurt by macroeconomic conditions in emerging markets, rising input costs and currency headwinds (read strong U.S. dollar). The company’s strategy of rising prices at the expense of volumes has got a mixed response from analysts and some view it as an unsustainable solution. The company’s last quarterly EPS missed the Street's view by 2 cents.

Mondelez, along with others in the industry, is facing pressure from developed markets where consumers are opting for healthier snacks rather than processed foods. The impact is evident in its European organic sales which fell 1.1 percent during the fourth quarter compared to 2.6 percent growth in North American revenue.

Activist investors such as Pershing Square and Trian Fund Management are after Mondelez management to improve sluggish performance.

For 2016, the company continues to expect adjusted operating income margin to be 15 to 16 percent, and expects to be at the lower end of that range to reflect an approximately 50 basis point headwind resulting from the deconsolidation of its operations in Venezuela. In addition, the company expects to deliver an adjusted operating income margin of 17 to 18 percent in 2018.

“We believe the new FY16 margin target remains at risk. MDLZ’s new guidance of 2%+OSG and margin +190bps (i.e. the low end of 15%-16% margin) still seems ambitious. A tougher economic environment, price gap realignment, A&C reinvestment, and SKU rationalisation/delisting, make the next 12 months even more testing than 2015,” Nomura analyst David Hayes said in a note to clients.

Hayes, who has a price target of $36 on MDLZ shares, noted that the company faces the risk of ‘significant price normalization’ and believes that the company is at risk of getting caught in a no-man’s land – missing both OSG and margin targets in fiscal 2016.

More Upside In Coca-Cola

In another development, Nomura analysts believe that they continue to see upside in Coca-Cola shares and raised their target price by $1 to $54. Analyst Ian Shackleton sees additional upside in the form of cost-cutting, bottling reconfiguration moves and the potential for price/mix in North America.

Coca-Cola is due to report its quarterly numbers on February 9. Wall Street expects the soft drink major to earn 37 cents a share on revenue of $9.91 billion for the fourth quarter.

Shares of Mondelez were down 2.76 percent at $36.65 and KO stock was down 0.5 percent at $42.19.