Cost Cuts and Potential Kraft-Heinz (KHC) Bid Could Be Next for Mondelez (MDLZ) - RBC

August 30, 2016 1:22 PM EDT
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Price: $44.60 --0%

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RBC Capital analyst David Palmer weighed in on what Mondelez's (NYSE: MDLZ) dropped bid for Hershey (NYSE: HYS) means for the company.

Palmer said while Mondelez could look for other acquisitions, they continue to believe the company will drive earnings growth through internal cost measures ahead of a potential acquisition bid by Kraft-Heinz (NYSE: KHC).

"While we cannot know for certain what motivated Mondelez to attempt this deal now, we suspect the company did believe it had somewhat of a chance to acquire one of the world's most sought after CPG assets amid a time of extraordinary pressure to create shareholder value," he commented.

He added, "Mondelez remains a significant under-earner in US Food ('16E EBIT margin 15.4% versus sector average 17.5%) and, in our view, remains the most logical next acquisition target of 3G Capital-controlled Kraft-Heinz. While global category growth has slowed modestly (baseline sales in measured channels down 0.4% in the 12 weeks ending 8/13 versus up 1.8% in the 12 weeks ending 5/21), the company still participates in growth ~2pp higher than peers amid a favorable cost environment, providing clear line of sight to differentiated long-term top- and bottom-line growth."

The firm maintained an Outperform rating and $54 price target on Mondelez.

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