Formula concerns hurt Mead Johnson shares

Regulators are investigating whether a recent infant death was related to the company's Enfamil product.

By Jim J. Jubak Dec 23, 2011 3:20PM
There’s nothing more heartbreaking and shocking than the death of a child.

Shares of Mead Johnson Nutrition (MJN) dropped like a stone Thursday, and were down another 6% Friday, on news that an infant given the company’s Enfamil baby formula had died from a bacterial infection. Wal-Mart (WMT) and Supervalu (SVU) subsequently pulled cans of the product from their shelves.

Post continues below.
The markets are operating on a dearth of information and an abundance of rumors. Initial news reports called Wal-Mart’s action a "product recall." It isn’t. It’s a voluntary decision by Wal-Mart to take the product off its shelves. The U.S. Food and Drug Administration has launched an investigation into the infant death, but won’t have a result for a week or so. (Mead Johnson Nutrition is a member of my Jubak Picks portfolio.)

The baby, in Lebanon, Mo., tested positive for Cronobacter, a bacteria that can cause serious illnesses in newborns. The company tested the batch used by the child’s family when it was produced and when it was packaged with no signs of bacterial contamination in either test. The company has also now tested the batch again after the child’s death and found no evidence of the bacteria.

Enfa brands -- which include Enfamil -- account for 79% of Mead Johnson Nutrition’s sales. A second child in Missouri has been reported sick with the same bacteria. That child recovered and although that child is known to have consumed formula, at this point no one knows what brand was involved.

And right now it’s unclear if the bacteria were in the formula as manufactured or sold, or were introduced into the formula when it was prepared for the child, perhaps from a water source.

And we won’t know until the FDA completes its investigation.

At this point I think there are three possible scenarios for the stock.

First, the FDA investigation discovers that the formula wasn’t the source of the bacteria, and clearly identifies another source. In this case I think the effect on the stock and on company sales is minimal.

Second, the FDA concludes that the batch was clean, but other stores follow Wal-Mart and Supervalu’s lead anyway and consumers switch to other brands. Credit Suisse estimates this would result in a loss of about 2 percentage points of market share over the course of a year and a decline of about 6% in the company’s stock. (Credit Suisse based this and the next scenario on a comparison with the recall last year of Abbott Laboratories Similac formula.)

Third, the FDA discovers bacteria in the batch of formula and evidence that it wasn’t introduced by the child’s family. The problems for Mead Johnson drag on, sales drop costing the company 6 percentage points in market share. The shares fall by about 16%.

With the stock down 15% yesterday and today, the market is clearly discounting pretty much all of the worst-case scenario created by Credit Suisse. I certainly wouldn’t recommend buying on the drop -- we simply don’t know enough for that. But investors should also recognize that markets have quickly moved to price in much of the worst-case scenario.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did not own shares in Mead Johnson Nutrition as of the end of September. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 
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3Comments
DAVID KEENEY (DKEEN783)
Dec 23, 2011 4:46PM
avatar
Its good to see such a quick reaction to this, erring on the side of caution.  Retailers, and manufacturers all jump.  My prayers go out to the family. 
     Irony enters when we consider ALL the children that will die this Holiday season, on the roads, in the home, on the streets, of hunger and want worldwide, &  for lack of basic necessities.    Their needs are no less urgent, their situations no less tragic.   Lets jump for them too, huh?  
Ryan in Texas
Dec 23, 2011 6:33PM
avatar

We have no evidence that it wasn't a dirty bottle, unsanitary conditions or the water used.

Removing millions of dollars of formula is something you do if you have evidence. There is no evidence connecting the formula to the babies death.

Now we are over reacting to any news.

Imagine if it is the municipal water. Will all water in the US be turned off until we find the cause?

Of course not.

Sad as it is, we need real evidence of it being the fromula before we jump to conclusions.

Cheezy2
Dec 23, 2011 8:54PM
avatar
That sure raises havoc with a stock and so far there is no proof the bacteria came from this product.... Goodness, too bad a little more investigation isn't done first to make sure where the source was.
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