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Mead Johnson: A Good Run, but Now Steady

By    |   Thursday, 05 April 2012 09:17 AM

Global nutrition company Mead Johnson (MJN), best known for its line of infant formulas, has had a good run over the past several years. So good, analysts say, that it remains unclear where the company will find new growth to support a higher share price. That makes it a steady, if not exciting, buy for now.

The company reported $3.7 billion in net sales in 2011. It provides the Enfa family of brands, including the well-known Enfamil infant formula, which it calls the world’s leading brand of formula based on retail sales.

The company is more than a century old, but its major focus has always been infant nutrition and healthcare. It offers 70 products to parents and healthcare providers in 50 countries. Asia/Latin America comprises 66 percent of sales, while North America/Europe represents 34 percent, as of the end of 2011. Infant formula is 59 percent of net sales and children’s nutritional products 38 percent.

Sales increased by 17 percent for the year, according to Mead management. “The sales growth was led by our Asia/Latin America segment, which grew by 26 percent,” management commented, led by “exceptional growth in Brazil and Peru.”

North America and Europe increased by just 3 percent, driven in part by competitor gains but also lower birth rates, they said.

Two major risk factors for MJN include rising commodity prices and the general economy. Higher raw material costs would raise the cost of its products, which already are considered premium offerings in the market. Similarly, a weakening economy could cause parents to seek cheaper alternatives to its Enfamil brands.

The company also participates in the U.S. government’s bidding process to supply formula through state-administered federal food aid programs. Mead Johnson estimates that it supplies 42 percent of children fed through the program, but it must continue to win those contracts to keep the business.

Mead Johnson has a market cap of $17 billion and a 12-month trailing P/E of 33.79, compared to 10.59 for its sector. Its five-year projected price to earnings growth (PEG) ratio is 2.99 compared to 2.30 for the food product sector.

Earnings per share growth for the coming year is projected to be 14.79 percent, vs. 12.05 percent for its sector.

Steady increase

The analyst consensus on MJN is evenly divided, with Standard and Poor’s rating it underperform and Ned Davis signaling a sell. EVA Dimensions analysts consider the stock at buy, as do the analysts at Deutsche Bank and William Blair & Company.

MJN has been a sell since early February, according to the analysts at Ned Davis, in part because of its steady increase in share value over the past few years. “On a relative basis, MJN has weak technicals and fundamentals. NDR’s Equity Focus Rank seeks profitable, undervalued companies with strong price momentum,” the analysts commented.

Mead Johnson next reports on April 26.

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