Is Mead Johnson in trouble?
Last quarter, Mead Johnson’s business was humming along nicely on stable, predictable global sales of its infant formula. GAAP-adjusted earnings rose 6.25% from the prior year quarter as revenue rose an adjusted 6%.
By comparison, Abbott Laboratories (NYSE:ABT) reported a year-on-year earnings decline of 56.2% as revenue only rose 1.8%. Therefore, it appeared that Mead Johnson’s basic, non-diversified product portfolio was a major advantage over Abbott’s diversified business of pharmaceutical products, animal health products, nutritional products and medical devices. Yet Nestle, with its strong core portfolio of food products, reported 14.8% and 12.8% growth in revenue and earnings, respectively.
However, a breakdown of Mead Johnson’s revenue by segments during the first quarter reveals some glaring risks. The company’s Asia/Latin America segment reported a 7% increase in sales to $755.3 million, but sales increased 6% from price and 1% on sales volume. In addition, its sales volume growth was largely due to its March 2012 acquisition of an Argentine company, Nutriciónpara el Conosur S.A. Lastly, EBIT for the segment actuallydeclined4.4% to $268.4 million.
In other words, Mead Johnson’s top line strength in Asia and Latin America is wholly based on pricing power, and even then it is struggling to grow its bottom line. If Mead Johnson lowers its prices in China in accordance with Nestle’s 11% reduction, then investors can expect some bad Asia/Latin America numbers for the rest of the year.
To make matters worse, Mead Johnson Nutrition CO (NYSE:MJN)’s market share in China declined slightly last quarter. A government-sponsored market consolidation could further reduce its market share.
The Foolish Bottom Line
In conclusion, Mead Johnson exposed itself very heavily to China and reaped the benefits over the past five years. The stock has risen over 150% during that period, but now it appears that the party might be over.
Mead Johnson Nutrition CO (NYSE:MJN) is now in the unenviable position of having to reduce its prices in its largest market, and compromise with a government that is invested in consolidating its domestic brands to regain the faith of its citizens. Although shares of Mead Johnson look fairly cheap, trading at 18.7 times forward earnings, its 5-year PEG ratio of 2.2 suggests slow growth ahead, and additional challenges in China means a bumpy road ahead for investors.
The article Is This Company’s Cash Cow Drying Up? originally appeared on Fool.com and is written by Leo Sun.
Leo Sun has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Leo 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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