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Consumer Staples: One Buy, One Sell

You should feel good about owning General Mills, but think twice about Mead Johnson

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Furthermore, although General Mills made some serious mistakes with Greek yogurt, I see Yoplait growing significantly in the next few quarters. It will be the best-performing brand at either company.

It’s a close call, but I like General Mills’ brands more.

Price Fixing

Considering the packaged goods industry is performing just fine on the whole, it’s no easy task to point to a selling opportunity. Nothing appears to stand out except a little price-fixing problem that Mead Johnson Nutrition faces in China.

Mead Johnson, along with other foreign manufacturers of infant formula, are being investigated by the Chinese government for colluding to raise the price of its baby formula. MJN, along with the other foreign companies, have raised prices 30% since China’s melamine crisis in 2008. A distrust of Chinese manufacturers of infant formula led to the foreign competition grabbing almost 50% market share. The resulting profits were tremendous.

In the first six months of 2013, Mead Johnson’s Asia/Latin America segment accounted for 80% of its total operating profits. In 2012, Chinese revenue was $800 million, or about 30% of its Asia/Latin America business. Its Asia/Latin America EBIT margin was 33% in 2012, which suggests China’s EBIT was approximately $264 million, or 23% of its overall profit. With the Chinese government looking to consolidate the domestic infant-formula industry, Mead Johnson’s money machine could be in the early stages of disappearing. With no other businesses to fall back on, a serious dent in its Chinese revenue would have permanent consequences.

Don’t get me wrong — Mead Johnson is an extremely profitable company. It expects 2013 earnings to be at least $3.22 per share. At current prices, that’s about 23 times its 2013 projected earnings — earnings it is growing at 10% annually, so it will take more than 10 years to earn back the price paid for its stock.

And that’s assuming the damage in China isn’t permanent.

If Mead Johnson Nutrition had a global monopoly on infant formula, I might be willing to take the risk on China. With three competitors as large as Abbott Labs (ABT), Danone (DANOY) and Nestle (NSRGY) duking it out in Asia, though, you’re better off owning their stocks rather than MJN.

For this reason … I’m out.

As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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