Will Mondelez (MDLZ) Disappoint Q3 Earnings Estimates? - Analyst Blog

Mondelez International, Inc. (MDLZ) is set to report the third-quarter 2014 results on Nov 5. Last quarter, the company delivered a positive earnings surprise of 2.56%.

Let's see how things are shaping up for this announcement.

Factors to Consider

Mondelez has been reporting weak top-line results ever since it split from Kraft Foods Group, Inc. (KRFT) in Oct 2012 due to emerging market choppiness and category weakness. In fact, Mondelez lowered its sales outlook twice this year to reflect slower global food category growth.

Mondelez's categories slowed down to less than 4% in 2013 versus 6% in 2012 due to difficult macroeconomic environment. In fact, in the first half of 2014, the company trailed category growth, recoding organic growth of just 2%, much less than overall category growth of 3.8%. Management expects the challenging retail and consumer environment to continue.

Moreover, input costs have begun to rise sharply this year, especially dairy and cocoa. As such, management increased the prices of most of its products in the first half of the year to cover higher commodity costs. However, as it priced ahead of competitors, especially in the emerging markets where consumers are more price-sensitive, Mondelez lost market share and witnessed declining volumes in the second quarter.

Management expects market share to continue to soften in the third quarter until competitors implement pricing and customer pricing disputes are resolved.

Though sales have been slower, Mondelez has delivered relatively better margins through cost savings and productivity improvement. We expect margin improvement to continue in the third quarter as well.

Earnings Whispers?

Our proven model does not conclusively show that Mondelez is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here, as you will see below.

Zacks ESP: The Earnings ESP is -2.50% as the Most Accurate estimate stands at 39 cents and the Zacks Consensus Estimate is higher at 40 cents per share.

Zacks Rank: Mondelez has a Zacks Rank #4 (Sell).

We caution against stocks with a Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Stocks to Consider

Here are some stocks that have both a positive Earnings ESP and a favorable Zacks Rank are:

Central Garden & Pet Company (CENT), with an Earnings ESP of +32.00% and a Zacks Rank #3 (Hold).

The J. M. Smucker Company (SJM), with an Earnings ESP of +1.21% and a Zacks Rank #3.