Bill Ackman apparently took a humongous position in MDLZ. The stock price popped up 5%-7% at first but went back to unchanged as the market tanked. And today, the stock is actually down a little.
When 3G/BRK bought Heinz, they boosted operating margins by 7% within a year, and in that case it was an outright purchase and not merger so there weren’t any ‘synergies’ but just pure cost cuts. Operating margins went from 14.4% to 21.5% in a year (check out Heinz Update: Who’s Next?).
The post-synergy Kraft-Heinz operating margin is over 25%.
Back to MDLZ
So, looking at it this way and going back to MDLZ, if you think 3G (or someone else) can do something similar again, the purchase price including synergies would look quite a bit different.
Adjusted operating margins are up to 14% at MDLZ. This is around the level of operating margins of HNZ before 3G took over.
Let’s say they can get this up to 22%. MDLZ had $33.4 billion in revenues in the last 12 months. 22% of that is $7.35 billion in operating earnings. Interest expense is $750 million (company guidance for 2015). That’s pretax profit of $6.6 billion. Using a 22% tax rate (company guidance for 2015 is for low 20s) gets us a net profit of $5.1 billion. 1.6 billion shares outstanding gets us an EPS of $3.20.
With the stock at around $46/share, MDLZ is trading at 14.4x P/E (post-3G-like-cost-cuts).
If they can get operating margins up to 25%, then the above math would get us to $3.70 in EPS, and MDLZ would be trading at 12.4x post synergy P/E. (25% operating margin might be a stretch, though, but I just used it because that’s the post-synergy operating margin of Kraft-Heinz.)
Now, that’s pretty cheap.
(The above figures don’t make any adjustments for the coffee business (which now goes through equity earnings and not revenues, operating earnings etc.); it shouldn’t make a huge difference to this rough analysis.)
The interesting thing here is that only 20% or so of sales (and slightly more in segment profits) is in North America. 40% of sales is in Europe. And they have a lot of exposure to the emerging economies. This is good and bad, of course, depending on what’s going on in the world. But it seems like the U.S. is a step or two ahead of everyone in terms of the economic cycle. Emerging markets have been in a down-cycle for a while now, and these things eventually turn.
It is possible that if Europe and other economies are behind the U.S. in the economic cycle, that they might turn which would be very good for a company like MDLZ.
MDLZ is a much growthier name than other food companies, like, say, Kellogg, Campbell’s etc.
Still, it is highly unlikely that 3G will come out with a bid very soon. That doesn’t mean MDLZ can’t do pretty well on it’s own for a while. Some stability in Europe and emerging markets, continued cost-cutting etc. can make MDLZ a decent stock to own until someone is ready to really take costs out of this thing, at which point if sales are higher, MDLZ could be even more interesting to 3G or someone else who can do something similar.
At it’s current price, someone like 3G would be able to ‘create’ an investment with some real growth potential at 12-14x P/E.