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Coverage Initiation: Mead Johnson Nutrition Company
Pediatric nourishment company, Mead Johnson (MJN), produces and sells a variety of infant formula, child nutrition items, and other products, which made up 64% , 33%, and 3%, respectively, of 2009 sales. The product portfolio encompasses more than 70 items, ranging from formulations for healthy newborns to those made for lactose intolerance, allergies, low birth weight, premature babies and other conditions.
The company recently set about on its own two legs, thanks to a spin-off from parent, Bristol-Meyers Squibb Company (BMY). The divestiture of the nutritional unit was a bit unusual in that Bristol Meyers offered current BMY shareholders the opportunity to exchange one BMY share for 0.6313 MJN share, forcing BMY owners to choose. Investors could not have both stocks unless they traded a portion of their BMY holdings in return for MJN shares. However, investors appeared to cheer the move, since MJN stock has climbed more than 100% since the spin-off.
Market enthusiasm is likely thanks to solid growth prospects, but, the recent run-up has muted some of the long-term price potential. In terms of a geographic exposure, this nutrition company is widening its reach especially China and India, where demographic trends are favorable. Latin America is prime for investment too, where plans for increased marketing ought to boost brand recognition, and distribution network improvements should bolster product accessibility. All in all, Mead Johnson operates in more than 50 countries.
Global expansion is not without risk, both on the regulatory side as well as on the manufacturing and sourcing end. Navigating multiple foreign authorities is a time-consuming and costly course of business, but is necessary for international augmentation. Too, quality issues can arise within nutritional products owing to raw materials and handling processes. At the end of 2008, Chinese authorities found significant levels of melamine in dairy that was used in infant formula, which resulted in the death of several infants. Mead Johnson was not found to have any quality problems, but market sentiment deterioration can hamper both sales and stock appreciation in such circumstances.
On the home front, which is the company’s largest market, birth rates have been relatively stable, excluding a recent decline that was likely due to the recession. Nonetheless, growth may come in other forms, such as product innovation. A new R&D facility at company headquarters, along with facilities in Mexico and Thailand, will support new formula introductions or other nutrition item launches with both a global and a local focus. The pipeline is well-stocked with over thirty new products brought to market in 2009 and additional roll-outs in store for the year ahead. Formula add-ins, such as prebiotics and probiotics, which add in digestion, and older child nutrition will likely be spotlighted in order to better meet the needs of specific customer concerns and lengthen the customer relationship at the same time.
However, competition remains active with many larger peers crowding the field. In the U.S., Mead Johnson has a strong foothold, garnering a larger market share than Abbott Labs’ (ABT) Similac product lineup or Nestle’s Good Start formula. Abroad the story is slightly different, as regional players also vie for customers and giants Pfizer (PFE) and France’s Danone come into the mix. Marketing plays an important role in the generation of sales and Mead Johnson expends a significant amount on its advertising agenda. But despite the potential to be easily outspent by its bigger competitors, MJN still holds a leading position in the industry.
An extensive and deep pipeline should be a boon to future earnings potential and coupled with solid R&D spending, the breadth and depth of nutritional items ought to continue to augment the product portfolio. Rising incomes in countries with booming populations also augur well for the sales stream. Mead Johnson is one baby that still has some growing to do.