Mondelez International: A Sweet Spot in a Weakening Inflation Environment?

Mondelez International (MDLZ) has been caught in a vice grip of inflation and currency headwinds, with Q1 2025 margins plummeting as cocoa prices surged and currency hedges backfired. Yet beneath the noise, the snack giant is positioning itself to capitalize on a turning tide. With inflation softening, resilient demand elasticity, and a valuation that's far more compelling than headlines suggest, MDLZ could be primed for a margin rebound in 2026—and investors who act now may catch a wave.

The Margin Squeeze: A Temporary Storm, Not a Tsunami

Mondelez's Q1 2025 results were brutal: gross profit margins collapsed to 26.1% from 51.1% a year earlier, while operating margins plunged to 7.3% from 29.4%. Cocoa cost inflation, unfavorable currency mark-to-market impacts, and ERP implementation costs were the culprits. But here's the key: these are transient issues.

The cocoa price surge, which contributed 80% of gross margin headwinds, is expected to ease as global supply tightens and demand cools. Analysts project cocoa prices to decline by ~15% in 2026, which could unlock $300 million+ in annual gross margin relief. Meanwhile, currency impacts are fading as the dollar stabilizes, and ERP costs will peak in 2025 before dropping sharply.

Why the Valuation Case is Stronger Than It Looks

Mondelez's P/E of 24.6x has drawn criticism as “expensive” compared to peers like Hershey (21x) or General Mills (11x). But this is a misleading metric. A deeper look reveals two critical points:

1. Growth vs. Value Mispricing:
   Mondelez is projected to grow EPS by 8.3% annually through 2026, far outpacing peers like Kellogg (-2% growth) or Conagra (-3%). At a PEG ratio of 3.0x, the premium is justified only if growth materializes. But here's the kicker: Analysts expect EPS to rebound to $3.21 in 2026, a 10.7% jump from 2024 levels, which would push the P/E back to a more reasonable 18x-20x range.

1. Free Cash Flow Dominance:
   Mondelez generates $3+ billion in annual free cash flow, enabling aggressive buybacks. In Q1 alone, it spent $1.5 billion repurchasing shares at an average price of $57.91—20% below current levels. This signals confidence in its valuation and long-term prospects.

Resilient Demand: The Secret Weapon

Mondelez's brands—Oreo, Cadbury, and belVita—are category killers with pricing power. Despite a 3.5% volume decline in Q1, organic revenue grew 3.1% due to price hikes. This shows demand elasticity is far lower than feared: consumers are willing to pay up for snacks, especially in emerging markets.

• Europe: Cadbury chocolate saw double-digit revenue growth despite price increases, thanks to Easter promotions and brand loyalty.
• Emerging Markets: China and Brazil delivered strong gains, with over 100,000 new retail outlets added in Q1. Even in soft spots like India, the biscuit category (a Mondelez stronghold) grew 7% in Q1.

Risks to Watch—and Why They're Manageable

• Cocoa Prices Stay Elevated: A worst-case scenario where cocoa costs don't ease could delay margin recovery. But the company's Cocoa Life program—which sources 91% of cocoa sustainably—gives it a leg up on supply chain stability.
• North America Retailer Destocking: Q1's 3.6% revenue drop in the U.S. was due to inventory corrections, not weak consumer demand. Management expects this to reverse by mid-2025.
• Valuation Squeeze: If peers rally, Mondelez's P/E premium could shrink. But with a consensus price target of $72.93 (8.5% above current levels), the Street still sees upside.

The Institutional Backing Signal

Wells Fargo's recent upgrade to Overweight (with a $78 price target) isn't an outlier. Insider buying has surged, with executives purchasing shares at depressed prices. Meanwhile, active mutual funds increased holdings in MDLZ by 15% over the past quarter, signaling a shift toward long-term conviction.

The 2026 Case: Why Now is the Time to Buy

Mondelez is a classic value trap… or a classic value play, depending on the horizon. The near-term pain is real, but the catalysts for 2026 are clear:
- Cocoa prices drop, unlocking $0.50+ in EPS from margin expansion.
- Share repurchases dilute the EPS hit, boosting returns.
- Emerging markets and Europe continue to outperform, driving top-line resilience.

At current prices (~$66/share), MDLZ offers a 26% upside to GuruFocus's $83.88 fair value estimate. Even a conservative 2026 EPS of $3.21 at a 20x P/E would hit $64—meaning investors could profit from a rebound in multiples and earnings.

Final Take: Buy MDLZ with a 2026 Lens

Mondelez isn't a “set it and forget it” investment. Near-term volatility is inevitable, especially if cocoa prices spike again or the U.S. market sputters. But for investors willing to look past 2025's turbulence, MDLZ offers a compelling mix of margin upside, free cash flow, and undervalued growth.

Actionable advice:
- Buy now if you can stomach short-term dips.
- Average into dips below $60, where the stock last traded during Q1's margin shock.
- Hold until 2026, when the EPS rebound should push the stock toward $70-75.

The cookie jar is full—but the best bites are still to come.