Mead Johnson's stock is now efficiently valued

For this premier formula seller in China, it's just a matter of time -- and some advertising -- before sales are back to normal.

By Minyanville.com Apr 19, 2013 3:11PM
family copyright Rubber Ball, Getty ImagesBy Ronald Thomas, CFA

Mead Johnson Nutrition (MJN) is up 19% since being recommended at $68 in early December 2012. My target price was $81, based on a 9% five-year EPS growth rate.

While some consumer staples stocks have gone up more in the search for dividend yield, those stocks still have the private label specter hanging over them and will have continual sales volume pressure in the U.S. and most likely in Europe as well. Mead Johnson should not have the pricing pressure as long as prices are not raised, which should make MJN a safer long-term holding than other staples stocks, many of which are overvalued at this point. But the company's 1.8% yield will not be competitive in the shorter term.

The stock flirted with $81 but fell back to the low $70s when Chinese law changed -- it no longer allows individuals to buy large amounts of Mead's formula in Hong Kong and take it to the mainland to resell. This sort of distributional curiosity was caused by a consumer overreaction to the sale of formula by domestic Chinese companies that had tainted domestic milk in it. This was about five years ago. Mead's Hong Kong formula is imported from The Netherlands, while the formula that is sold in mainland China is manufactured in China, but made from imported milk. A disproportionate amount of Chinese sales were being made via Hong Kong, so sales have been affected.

As a premier formula seller in China, I feel that it is just a matter of time, and some advertising, before sales are back to normal. The stock was moving up on just that thought, I believe. Then it got to $81 after Danone (DANOY) reported strong formula sales in China and the Far East. Overall pricing was up 9% vs. the Street's expectation of 6%. That makes me feel better about the longer-term pricing level maintenance for Mead, though I would not raise my EPS growth rate for it. 

I would be somewhat leery, however, about the fact that some of the pricing taken by Danone, the No. 2 seller in China, may have come from sales problems at Mead. Danone just came out with some new products, but it also seems too easy to conclude that Mead’s sales adjustment from Hong Kong to mainland China formula has been discounted in one quarter.

Therefore, earnings to be reported on April 25 may be somewhat disappointing vs. the optimism engendered by the Danone report.

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