by Jon Markman | May 7, 2012 6:00 am
In a world where you can invest in such sophisticated businesses as investment banks, fiber-optic component makers and organic food retailers, it may not occur to you to consider a maker of pediatric-nutrition products. But Mead Johnson Nutrition (NYSE:MJN) has been one of the best-performing stocks in the world in the past two years, steadily moving higher with only rare hesitations.
One of those hesitations came in the past two weeks, but a solid earnings report this morning has erased any negative feelings and put the company back on track. This is a stock that can regularly hit new highs and lead its sector, so I want you to initiate a new position in it.
The company’s goal is to be the world’s leading nutrition company for babies and children. Well, it’s almost “mission accomplished” since MJN is neck-and-neck with Nestlé (PINK:NSRGY) for that title. More than half of MJN’S revenues are from the infant-formula division, with several recognizable brands under the Enfamil banner and a slew of specialized products ranging from prenatal supplements to products for growing children filling out the portfolio.
After Edward Mead Johnson Sr. left Johnson & Johnson, which he co-founded, he started the Mead Johnson in 1905 in New Jersey. Five years later he developed the company’s first product, Dextri-Maltose, a milk-based product that became the first American feeding product approved for infants. The company stayed in the Johnson family for 60 years until Bristol-Myers, now Bristol-Myers Squibb (NYSE:BMY), purchased it for $240 million in 1967.
Mead Johnson was a successful but under-appreciated brand at BMY for the next 45 years, which is why the drugmaker decided to spin it off. CEO Stephen Golsby led the spin-off and is still in charge.
From the outside, Mead Johnson may appear to be just a food product company with a focus on kids, but it invested nearly $100 million in research and development last year, spread out among areas such as cognitive neuroscience, protein biochemistry, neonatology and pediatric gastroenterology. In fact, Mead Johnson was one of the first U.S. companies to focus scientific research on nutrition for infants and children.
The company’s recent focus has shifted to the premium segment, where higher-margin opportunities give it flexibility to exhibit more innovation and easily absorb higher input costs. That innovation led to 17 new products in 2010 and more than a dozen last year.
Several external factors also are fueling the company’s growth, including rising disposable incomes, rising birth rates around the world, and growing numbers of dual-income families, where breast-feeding has become more of a luxury than a must.
A lot of this growth is international, with China becoming the company’s largest market behind the U.S. in 2011, surpassing $1 billion in sales. A new plant in Singapore, scheduled to come online in 2014, will help support growth projections for Asia while improving costs and shipping times.
According to Morningstar analyst Dave Sekera, Mead Johnson owns 40% of the market and has three main competitors in the U.S., including Abbott Laboratories‘ (NYSE:ABT) Similac and Nestle’s Good Start products.
There was a bit of a scare a few months ago when two infants died as a result of Cronobacter bacteria thought to have originated in cans of Enfamil Newborn formula bought from Wal-Mart Stores (NYSE:WMT). Obviously, there was an immediate negative reaction in the shares, but after a thorough investigation by both the Food & Drug Administration and the Centers for Disease Control & Prevention, no trace of the bacteria was found in Mead Johnson products.
The agencies noted that there was no need for a recall and that parents were free to continue using the company’s infant formula. Not only did Mead Johnson’s shares regain their momentum in the weeks following the scare, shares are up nearly 18% since the beginning of the year.
A strong focus on emerging markets and premium products led the company to 17% revenue growth and 12% earnings growth last year despite a challenging macro environment. Mead Johnson reported first-quarter earnings last week, and they were excellent as usual.
Even though the shares are up quite a bit, they’re still relatively cheap — and nutritious.
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