Mead Johnson Bounce Followed J&J Script

by Barry Cohen | January 4, 2012 9:40 am

Mead Johnson Bounce Followed J&J Script

Those investors who started dumping Mead Johnson (NYSE:MJN[1]) shares after last month’s scare over alleged contamination of the company’s infant formula might want to consult their history books next time.

This fall will be the 30th anniversary of what undoubtedly was one of the most publicized product recalls in the annals of the health care industry. It occurred when Johnson & Johnson (NYSE:JNJ[2]) pulled back more than 30 million bottles of Tylenol — valued then at about $100 million — following the deaths of seven Chicago-area residents after taking capsules of the pain reliever that had been poisoned.

On the day the deaths were announced, J&J shares plunged 17%. Of course, the company wasn’t responsible for the cyanide-laced pills and handled the scandal in such a professional manner that its efforts still are heralded in today’s crisis management textbooks. As a result, just more than a month after the story broke, J&J shares recovered to the pre-poisoning price and continued to rise through January of the following year. Shareholders who showed their faith in the company were duly rewarded.

It appears that investing history is repeating itself in the case of Mead Johnson. In late December, a 10-month-old baby who had been fed the powdered version of the company’s infant formula, Enfamil, died. Immediately, retailers — including Wal-Mart (NYSE:WMT[3]) and SuperValu (NYSE:SVU[4]) — started pulling the product from their shelves. Naturally, investors became concerned, as the Enfa brands accounted for almost 80% of Mead Johnson’s 2010 revenues and were the world’s best-selling baby formulas at the time, according to a company filing.

Figuring as goes Enfamil, so goes Mead Johnson, investors started unloading the company’s shares. Trading at $76.48 on Dec. 21, Mead dropped nearly 15% during the next two days and stayed near that price until year’s end.

The issue undoubtedly threatened to put a damper any New Year’s celebration at the company’s headquarters outside Chicago. But on Dec. 30, Mead and its shareholders heaved a sigh of relief when Enfamil was cleared of causing the infant’s death infant and the sickening of three other children who had been fed the formula. Both the Centers for Disease Control and Prevention and the FDA said a batch of the product wasn’t related[5] to the four cases of bacterial infection.

When the market re-opened Tuesday, Mead shares began climbing, trading above $73 before closing at $71.34, up almost 4%.

Edward Aaron, an analyst with RBC Capital Markets, said in a research note that the company’s shares would react favorably on the news that it had been cleared of any wrongdoing, according to Bloomberg[6]. “Ultimately, we see this as an opportunity to own the same great growth story at a cheaper valuation,” he added.

The lesson here is this: While not all health care product recalls are created equally, it’s wise to look at the character of the company involved and the stringent checks and balances they have in place to assure the safety and quality of their products. Mead’s case was much different than J&J’s. But both companies have been in business for a long time, and neither is likely to jeopardize their sterling reputations by cutting corners.

For investors, remember the words of Warren Buffett: “Be greedy when others are fearful.” Doing so in this case would have provided a quick and nifty profit.

As of this writing, Barry Cohen was long Johnson & Johnson.

Endnotes:
  1. MJN: http://studio-5.financialcontent.com/investplace/quote?Symbol=MJN
  2. JNJ: http://studio-5.financialcontent.com/investplace/quote?Symbol=JNJ
  3. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT
  4. SVU: http://studio-5.financialcontent.com/investplace/quote?Symbol=SVU
  5. wasn’t related: http://finance.yahoo.com/news/Mead-Johnson-rises-regulators-apf-3944777061.html?x=0
  6. according to Bloomberg: http://www.bloomberg.com/news/2012-01-03/mead-johnson-shares-gain-as-baby-illnesses-not-linked-to-company-s-formula.html?cmpid=yhoo

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