Mead Johnson Nutrition

Mead Johnson Nutrition Company (MJN) manufactures, distributes and sells infant formulas, children’s nutrition and other nutritional products. It’s the only global company primarily focused on pediatric nutrition. Its Enfa family of brands, including Enfamil infant formula, is the world’s leading brand franchise in pediatric nutrition, based on retail sales, and accounts for approximately 80% of MJN’s net sales.

MJN markets its products in more than 50 countries. Asia accounts for 50% of revenue, North America/Europe 33% and Latin America 17%.

mead-johnson-financials-10y-2017-02-03mead-johnson-profitability-10y-2017-02-03

Source: Morningstar.com

First Study

I have been following this company since June 2015. Back then, the price just came down from the peak of $105 to $93.

It’s a good company with reputable global brand and strong cash generator. If you build your portfolio holding several companies with this kind of quality over long term (10 years or more), you are likely to do ok, perhaps achieving, on average, S&P 500 return. This can beat the performance of most fund managers out there.  If you want to analyze each company and its near term prospect, then it will take much more effort.

Analyzing MJN at that time, you would realize that it was facing headwinds. Growth was declining, especially in China, and yet the valuation did not reflect it with high P/E at 26x. I reckoned the high P/E was due to the strong bull market that was running in US. Despite the headwinds, the sell-side analysts, on average, were still forecasting 10% earnings growth. The bigger risk was disappointing growth number could de-rate the valuation further.

For such a strong consumer brand company, I don’t expect to to buy at P/E below 18x. Since its IPO in 2009, it’s never sold at below 20x P/E. However, with the headwinds and growth falling to single-digit rate, I wasn’t willing to pay at P/E 26x. So, I skipped it.

Second Study

Just 4 months ago in October 2016, I looked at it again, and the price was $80, just bouncing off from the low of $70. Compared to June 2015, both revenue, margins and earnings fell substantially. Most analysts’ forecast for 2015 and 2016 earnings was way off. It shows again, you can’t rely on analyst forecast.

The earnings were hurt by price competition in China and depreciating foreign currencies, especially those in South America, which was beyond Mead Johnson’s control. Nevertheless, it’s impacting the earnings, and the economies don’t seem to get any better soon. I thought Mead Johnson was fairly priced at around $70-80 and didn’t buy it.

Acquisition by Reckitt Benckiser

Reckitt Benckiser Group Plc, a manufacturer and marketer of health, hygiene and home products, just announced its plan to buy Mead Johnson at $90 per share, nearly 30% premium to MJN’s share price. Reckitt Benckiser is a consumer group conglomerate based in UK with product brands, such as Dettol, Durex, Strepsils, Vanish, Nurofen, Clearasil, Air Wick, etc.

Mead Johnson - Share Price - 2017-02-03.PNG

Source: Google Finance

I missed out this acquisition on a Company that I followed for the past 1.5 year. I believe the transaction will close, and with it, I can stop following Mead Johnson too.

Reckitt Benckiser 

Reckitt Benckiser is a great company itself. If you bought and held the shares over the past 18 years, you would have gotten 14-15% return per year, including dividends. Again, for such strong consumer brand company, you can’t buy it cheap at the moment. Its current P/E is 32.7x.

Back in 2011-2012, the P/E was just around 14-15x, and both the revenue and earnings were even higher than current level. Stock market was very worried about the European debt crisis at that time. Since then, the market has become more and more bullish, especially the US stock market. The next time recession occurs, prepare your cash and have courage to invest in many great companies.

Reckitt Benckiser - Share Price - 2017-02-03.PNG

Source: Google Finance

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