With Valentine’s Day just two days away, our stock of the week looks at chocolate makers. Our Twitter readers have chosen Cadbury owner Mondelez (MDLZ) to melt their hearts, ahead of gold chocolate bunny maker Lindt & Spruengli (LISN) and Swiss confectionery giant Nestlé (NESN).
US multinational Mondelez is one of the largest listed food producers in the world, with brands including Ritz crackers, Philadelphia cheese and Tuc biscuits. It was formed by the splitting off of Kraft’s empire into grocery foods and snack foods. (Kraft Foods is now part of Kraft Heinz). But it was Kraft’s acquisition of UK chocolate brand Cadbury in 2010 that brought the company to UK investors’ attention. Cadbury had been a part of the FTSE 100 for 26 years when Kraft swooped for the venerable Quaker-founded company, causing a bitter-sweet takeover battle that dragged in politicians, unions and fund managers – and the British public, who feared that the British chocolate may never taste the same under American corporate hands.
10 years later the row is largely forgotten and Mondelez counts fund manager Nick Train among its fans. Lockdown has perhaps nudged the obesity debate to the sidelines for now and consumers have rediscovered their love of home cooking and sweet treats.
“Mondelez’ Oreos, Unilever’s Hellmann’s and [Diageo’s] Magnum and Remy cognac have all done particularly well during the pandemic (and boosted the shares of their owners) as consumers have turned to home cooking and consoling treats,” Train says in the latest update for the Silver-rated Finsbury Growth & Income Trust (FGT). Mondelez is the fifth largest holding in the trust with a weighting of just under 10%, and its also held by Silver-rated Lindsell Train UK Equity Fund, as well as Lindsell Train Global Equity Fund, which also has a Morningstar Analyst Rating of Silver.
As for the company itself, Morningstar analysts rate the company as having a wide economic moat, with shares trading close to their fair value of $54 per share. “As a leading player in the global snack category, Mondelez has earned a wide economic moat rating resulting from the economies of scale gained from its expansive global network,” says analyst Erin Lash. “We believe its competitive edge is buoyed by its entrenched retail relationships, stemming from the vast resources it expends to support its portfolio of well-known brands at the shelf,” she adds. Lash notes that most of its revenue is now made from outside its domestic US market, with the company’s confectionery brands having the largest market share in Europe and Latin America. Still, Morningstar analysts prefer wide-moat Kellogg (K), whose shares are trading 25% below their fair value and carry a 4% dividend yield (versus Mondelez’s 2% payout).
The company makes up nearly 60% of the Morningstar Global Confectioners index, with The Hershey Co (HSY) as the next biggest weighting, with 15% of the index. 2020 wasn’t even the best year for the index over the last 10 years – that was 2019, when it rose around 29%, and the index has posted respectable annualised returns of 9% over the decade.
Still sugar has become an ESG issue in recent years, as ratings agency Sustainalytics flags up. Governments are looking to tackle the obesity epidemic with sugar taxes and changes to ingredients, while consumers are generally (lockdown aside) embracing healthier food. Consumers are also becoming more aware of the origins of the foods, which are generally sourced in developing countries, with lower labour conditions than in the West. “Many of Mondelez’ products require the sourcing of ingredients such as cocoa and palm oil. These commodities face systemic issues of child and forced labour, which could appear in the company’s supply chain. The growth of the palm oil industry, an inexpensive and cost-effective vegetable oil, has also contributed to large-scale deforestation in Indonesia and Malaysia, and cocoa has a long-standing history of deforestation issues.”
Still, Sustainalytics rates the company as “Medium Risk” from an ESG perspective, below “High” and “Severe”, and it praises Mondelez’s risk management as “Strong”: “The company has strong management systems across the board, outperforming its peers on several ESG issue areas. The company publishes a suite of performance targets for nutrition and health, sustainable ingredients, human rights and child labour, packaging innovation and key environmental metrics.”
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