Mead Johnson: Zacks’ Bear of the Day Play

Mead Johnson (MJNAnalyst Report) recently reported disappointing third quarter results as both sales and earnings fell short of consensus. Weakness in the emerging markets more than offset growth in North America and Europe in Q3.

Management also lowered its full year sales and EPS guidance, prompting analysts to revise their estimates lower too. In fact, the drop in consensus estimates has been significant enough to send the stock to a Zacks Rank #5 (Strong Sell), placing it in the bottom 5% of all stocks that Zacks ranks based on earnings momentum.

The valuation picture doesn’t look very compelling either with shares trading at more than 23x forward earnings. It sports a Zacks Value Style Score of ‘F’.

Mead Johnson Nutrition Company is a pediatric nutrition that makes more than 70 products. Its “Enfa” family of brands, includes Enfamil infant formula.

Third Quarter Results

Mead Johnson reported its third quarter results on October 22. Adjusted earnings per share came in at $0.80, missing the Zacks Consensus Estimate by 5 cents. It was a 14% decline over the same quarter last year.

Net sales fell 10% to $977.5 million, missing the Zacks Consensus Estimate of $1.041 billion. A decline in volume contributed 4 percentage points (p.p.) while foreign currency accounted for the other 6 p.p.

Strength in North America and Europe was more than offset by weak performance in emerging markets, including China.

The adjusted gross profit margin actually expanded from 60.1% to 64.9%. But this was more than offset by a higher tax rate, as the effective tax rate jumped from 17.2% to 28.1%.

Estimates Falling

Following disappointing Q3 results, management lowered its full year sales and EPS guidance. And analysts unanimously lowered their earnings estimates for both 2015 and 2016 following the Q3 report. This was significant enough to send the stock to a Zacks Rank #5 (Strong Sell).

The current Zacks Consensus Estimate for 2015 is $3.39, down from $3.68 thirty days ago. The 2016 consensus estimate is now $3.63, down from $4.05 over the same period.

Negative estimate revisions are nothing new for Mead Johnson. As you can see in the company’s “Price & Consensus” chart, consensus estimates have been falling steadily for several months now:

Two Child Policy to Boost Demand?

Some investors have piled into the stock after China announced that it will start allowing all married couples to have two children, ending its decades-long policy of one child for many families.

But many analysts, and even Mead Johnson itself, don’t expect this to policy change to significantly impact birth rates in China, given that previous rounds of relaxation didn’t spur a baby boom either.

Premium Valuation

The valuation picture doesn’t look very attractive for Mead Johnson. The stock trades at a lofty 23x 12-month forward earnings, and that’s if earnings estimates stop declining. Its enterprise value to EBIT ratio is 17.

The Zacks Value Style Score for Mead Johnson is an ‘F’.

Any benefit that the company might reap from China recently lifting its “one child policy” already appears to be priced in.

The Bottom Line

With falling revenue and profit margins, persistently declining earnings estimates and a forward P/E north of 20, Mead Johnson doesn’t offer investors much to like right now.

Todd Bunton, CFA is a Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor and Surprise Trader services.


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