How to milk China's baby boom

The country is projected to see increasing birth rates through 2016 -- and Mead Johnson Nutrition stands to gain from that rise.

By Jim J. Jubak Nov 23, 2011 3:45PM

Next year is the year of the dragon -- the icon of China’s emperors, symbolizing power and wealth.

Families in China see children born in a dragon year as especially fortunate, and these years historically produce a mini baby boom with about 5% more births. Add that to the echo from China’s own baby boom and the loosening of government restrictions on family size, and China is projected to see increasing birth rates that peak around 2016.

That’s led to a stock market boost in shares of companies likely to tap into the baby bump. Chinese companies such as Inner Mongolia Yili Industrial Group (baby formula), Hengan International Group (baby diapers), and Boshiwa International Holding (retailer of kids clothes) have been tagged by China-based analysts as beneficiaries of the baby bump.

But I think Mead Johnson Nutrition (MJN) is an even better bet. Because of repeated scandals when toxic chemicals were discovered in powered milk and baby formula -- three years ago tainted formula killed six infants -- produced in China, many Chinese consumers prefer overseas brands made by Mead Johnson and France’s Danone.

China’s baby-food market is projected to grow by 22% in 2011 to $11 billion and to double by 2015, according to Euromonitor International. As household disposable income rises in urban areas -- and per capital disposable income in those areas rose 8% in 2010 -- more Chinese families are able to afford the higher prices of overseas products. In 2010 Mead Johnson led China’s infant formula market with an 11.7% share. Danone was No. 2 at 9.8%.

Mead Johnson announced third quarter earnings on Oct. 27 that beat Wall Street projections but then the company disappointed investors by raising guidance to $2.73 to $2.78. That was up from previous guidance of $2.70 to $2.75 a share but below the existing Wall Street projection of $2.79.

I think this gives you a chance to pick up this stock at a reasonable price near $70 to $71 a share. What you get for your money is a share of a company with a sales network that covers 250 Chinese cities (with another 50 scheduled to be added in 2012.) About 24% of the company’s sales in 2010 came from China. That’s up from 16% in 2009.

As of Wednesday, I’m adding these shares to Jubak’s Picks with a target price of $79 a share by June 2012. The shares pay a dividend of 1.4%.

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 of 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.

Tags:

chinainvesting strategyinvestmentsJim JubakMJN

1Comment

Best

Nov 28, 2011 12:21PM

Really sad that the Chinese are giving their babies junk food. There's never been any traces of melamine found in breast milk. And what a waste of money!

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