Best of breed plays
In the next seventeen years the US population of people 65 and older is expected to double from 35 million to 71 million, according to the US Census. Although the US birth rate declined during the recession it’s creeping back up, and at an average of 4 million US babies born per year there is a huge market for infant nutrition.
This doesn’t even address the much larger demand in emerging markets, especially India and China. China’s demand for baby formula is so great that smuggling and blackmarket operations of non-Chinese formula are rife after a tragic scandal in 2008 involving melamine tainted formula from a Chinese manufacturer that killed six babies and sickened over 300,000. China was already the biggest market globally for milk-based formula.
What is working for all these mega-trends are the nutritional stocks, specifically GroupeDanone Mead Johnson Nutrition CO (NYSE:MJN) and Abbott Laboratories (NYSE:ABT).
Abbott Laboratories (NYSE:ABT) parlays profits from both adult nutrition, canned nutritional products that supplement meals for the aged who may suffer from lack of appetite or just need a boost to their diet, and infant nutrition. The company has more than 17 brands addressing the needs of babies, the aging, and even athletes, and is the number one infant nutritional company in the US.
Abbott Laboratories (NYSE:ABT) has co-founded the Alliance to Advance Patient Nutrition with several health professional organizations specializing in hospital patient care to battle and prevent malnutrition in hospital patients. This is a serious problem, as malnourished patients are more likely to suffer from infections and pressure ulcers. Abbott has a subdivision of therapeutic nutrition for sufferers of diseases such as diabetes, cancer, and osteoporosis.
It offers specialty feeding solutions to infants and children with food allergies, special gastric disorders, and nutritional supplementation to older children, especially picky eaters.
As the largest of these companies, and with other divisions including established pharmaceuticals, diagnostic products, and vascular products it is the least pure play on supplemental nutrition. One could see its other divisions as an extra kicker to a baby boomer benefit portfolio, but its recent spinoff, AbbVie, with its emphasis on pharmaceuticals and a 3.40% yield, is the way to go.
Abbott Laboratories (NYSE:ABT) has a trailing P/E of 10.45 with a 1.50% yield at a 51% payout ratio. The stock is up 28% over the last year and it’s a stalwart performer, the core of many a value portfolio. I wish it would spin off its Nutritional division much like Bristol Myers Squibb did with Mead Johnson Nutrition CO (NYSE:MJN) in 2009 to create an even purer play rather than having the Nutritionals segment being the company’s cash cow carrying the other divisions.
The aforementioned Mead Johnson Nutrition CO (NYSE:MJN) offers 70 products, including regular formulas, specialty feeding solutions for infants with food allergies and special gastric disorders, and nutritional supplementation to older children, especially picky eaters. It even covers infants in the womb with specialty milk drinks and supplements for expectant and breastfeeding mothers.
It trades at a forward P/E of 22.86 with a 1.70% yield and a 2.20 PEG. The stock had gotten a little ahead of itself since its IPO, running from the high $20’s in 2009 to a 52 week high of $88.72 last June. This last year it’s only up 4.51%.
The global company covers 50 markets, but Mead Johnson Nutrition CO (NYSE:MJN) is focusing on the emerging market with two of its three Pediatric Nutrition Institutes located in Mexico and China. Asia and Latin America led sales growth at 7%, compared to only 1% in North America and Europe for Q1 reported in April.
Caveat: the Chinese government has limited exports of formula into China and Hong Kong since March 1, which led former CEO Stephen Golsby to comment on the Q1 call, “While still cautious about China/Hong Kong, we remain confident in our 2013 performance.”
Emerging market demand is so strong that in 2011 Mumbai-based Wockhardt Ltd.’s pediatric and adult nutritional business was the object of a three way bidding war between Abbott Laboratories (NYSE:ABT), Pfizer Inc. (NYSE:PFE) and Danone. Danone finally won with a bid of 250 million euros.
Paris-based Danone, the world’s largest yogurt company (better known for Dannon yogurt in the US), has a large infant nutritional division, as well as bottled waters and yogurt. Its Dumex infant formula is a big seller in China with a 9.8% market share, compared to Mead Johnson’s 12% and Abbott’s 5%.
While Danone may not have a yield, it’s a better value with a 5.52 forward P/E and a lower PEG of 1.17. Its Oikos Greek yogurt is the number one yogurt in the US. The boomer-oriented Activia yogurt for aging digestive systems (yes, Jamie Lee Curtis of “Trading Places” is plugging senior yogurt) is another play on Boomers.
Its most exciting product is Souvenaid, a medical nutritonal supplement for early stage Alzheimer’s memory loss, currently available only in the UK. The addressable market worldwide is huge and should soon be more widely available.
The company reported that both 2011 and 2012 total sales growth was pumped up by bottled waters (Evian and Volvic) and the infant nutrition sales. Expanding on the success of infant nutrition Danone agreed on May 13 to acquire the Happy Family baby food company of New York.
The Foolish takeaway
The most exciting name is Danone, as it’s lightly traded with a low valuation. Its recent acquisitions are complementary to its product mix and the Souvenaid product should be a game changer.
Although they have yield, I like Abbott Laboratories (NYSE:ABT) and Mead Johnson Nutrition CO (NYSE:MJN) less than Danone. They are not the purer plays and don’t have the growth of Danone. That said, these are three powerful trends, aging Boomers, Boomer babies, and emerging markets that make for compelling reasons to bet big.
The article Bet Big on Boomers and Babies originally appeared on Fool.com and is written by AnnaLisa Kraft.
AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. AnnaLisa is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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