Stock Futures – Declining Stock and Decent Financials: Is The Market Wrong About Mondelez International, Inc. (NASDAQ:MDLZ)?

With its stock down 1.9% over the past month, it is easy to disregard Mondelez International (NASDAQ:MDLZ). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Mondelez International’s ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. Put another way, it reveals the company’s success at turning shareholder investments into profits.

See our latest analysis for Mondelez International

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

So, based on the above formula, the ROE for Mondelez International is:

11% = US$3.1b ÷ US$27b (Based on the trailing twelve months to September 2020).

The ‘return’ is the amount earned after tax over the last twelve months. That means that for every $1 worth of shareholders’ equity, the company generated $0.11 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.

A Side By Side comparison of Mondelez International’s Earnings Growth And 11% ROE

To start with, Mondelez International’s ROE looks acceptable. Further, the company’s ROE compares quite favorably to the industry average of 9.3%. As you might expect, the 14% net income decline reported by Mondelez International is a bit of a surprise. We reckon that there could be some other factors at play here that are preventing the company’s growth. These include low earnings retention or poor allocation of capital.

Next, when we compared with the industry, which has shrunk its earnings at a rate of 0.5% in the same period, we still found Mondelez International’s performance to be quite bleak, because the company has been shrinking its earnings faster than the industry.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock’s future looks promising or ominous. Has the market priced in the future outlook for MDLZ? You can find out in our latest intrinsic value infographic research report.

Is Mondelez International Using Its Retained Earnings Effectively?

Despite having a normal three-year median payout ratio of 43% (where it is retaining 57% of its profits), Mondelez International has seen a decline in earnings as we saw above. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Additionally, Mondelez International has paid dividends over a period of at least ten years, which means that the company’s management is determined to pay dividends even if it means little to no earnings growth. Upon studying the latest analysts’ consensus data, we found that the company is expected to keep paying out approximately 43% of its profits over the next three years. Regardless, the future ROE for Mondelez International is predicted to rise to 16% despite there being not much change expected in its payout ratio.

Conclusion

Overall, we feel that Mondelez International certainly does have some positive factors to consider. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return and is reinvesting ma huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that’s preventing growth. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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