Mondelez Has A Buying Opportunity Around $40, Recent Weakness An Overreaction

The 15-percent pullback in Mondelez International Inc MDLZ shares from a high of $47 in early June was likely an overreaction to a combination of industry-wide and one-time, company-specific issues, according to a Bernstein note.

The firm said it sees a buying opportunity at around $40, where the stock is currently trading. Bernstein maintained an Outperform and $55 price target for Mondelez shares.

Industry-Specific Issues

At the industry level, analyst Alexia Howard said investor confidence may have taken a hit from the earnings misses reported by Dean Foods Co DF, J M Smucker Co SJM and Campbell Soup Company CPB, with the former two revising earnings downward.

The analyst also noted the resurfacing of talks concerning retailers pushing back on price and promotion. Additionally, the firm said the Amazon.com, Inc. AMZN threat gained momentum after Whole Foods Market, Inc. WFM slashed prices on Amazon's first day of ownership.

Company-Level Issues

Investors are worried about the skepticism regarding the new CEO and the possibility of rebasing earnings and margin targets, according to Bernstein. The firm also sees the reduction in stakes by activist investors Trian Partners and Pershing Square during the second quarter as a concern.

Additionally, the firm said investors were likely put off by Warren Buffett's comments on Kraft Heinz Co KHC's lack of interest in acquiring Mondelez.

Underlying Thesis Intact

Notwithstanding the issues, Bernstein said its underlying thesis remains intact. Mondelez' industry-specific issues are U.S.-centric, in a company that has about 80 percent international exposure.

"While Mr. Buffett's comments took out the acquisition premium and the CEO transition may create additional uncertainties, recovery in international markets and margin expansion driven by low input costs are likely to improve earnings in 2018-19," Howard said. 

Mondelez Is 'Our Top Pick'

Mondelez is trading at 18.6 times its P/FE and over one standard deviation below its historical averages relative to the S&P and U.S. Food peers, according to Bernstein.

"This, coupled with its international growth potential and the possibility of margin expansion, makes it our top pick."

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