Traders ate up Mondelez International calls Monday morning. Do they see a takeover around the corner?
Mondelez shares have slid nearly 6 percent from a June high because of the company's heavy exposure to emerging markets, which account for 80 percent of its revenue. Emerging markets have looked especially weak lately.
Monday's options activity, however, suggests that traders are positioning for a bounce. On Monday morning, 5,000 July 29 strike calls and 3,000 July 5 weekly calls were purchased for $0.75 and $0.40, respectively. The weekly options put the trader at risk for $120,000 as of Friday, and the overall commitment to this trade cost about $500,000 a million dollars.
With a 2 percent bump today, the stock is priced above $29. For the weekly calls to break even, Mondalez would need to rise just another 10th of a percent. On the other hand, for the July monthly calls to make this trader money, the stock would need to add roughly 1.5 percent.
After a Chinese company's bid to buy Smithfield Foods, this trader might think that Mondelez will be the next food company to get bought out. If Mondelez were to be purchased, the Smithfield deal would give us a good idea of the price we could expect. Shuanghui International has offered to take over Smithfield at a price-to-earnings ratio of 25.99. Mondelez's forward price-to-earnings ratio is 18.84, which seems a little low when compared with that of competitors. Kraft has a P/E of 20.77—very similar to competitor Tyson, with a P/E of 20.32.
With Mondelez focusing on international emerging markets, especially China, and Smithfield Foods being acquired by a Chinese company, they both have similar interests. But Mondelez is trading at a valuation significantly lower than Smithfield's. If the former were bought out at a valuation similar to the latter's, the shares could go for $40 each. That is a 33 premium over current market value, which would be a handsome reward for today's call buyer.