Downside Risk At Mead Johnson

By Ryan C. Fuhrmann | February 02, 2010 AAA

Infant Formula maker Mead Johnson Nutrition Company (NYSE:MJN), which was spun of from Bristol Myers (NYSE:BMY) in February 2009, is preparing for its first full year as an independent firm. At the current valuation and with analysts' eyes watching, the market isn't leaving much room for error. (Calculate whether the market is paying too much for a particular stock. Check out DCF Valuation: The Stock Market Sanity Check.)

IN PICTURES: Vacation Savings Tips
Fourth-Quarter Highlights
Net sales improved a modest 1% to $714.4 million as pricing and currency translation gains offset slower volumes, which was attributed to a reduction of distributor inventories in Europe and lower birth rates in the U.S. North America and Europe collectively posted an 11.8% decline in sales as Asian and Latin American sales witnessed a 15.1% increase.

Earnings before interest and income taxes (EBIT) fell 16.2% to $113 million on costs to bring Mead Johnson public and the subsequent spinoff, which totaled $54.2 million. However, interest expense and income taxes fell dramatically, allowing net income to improve 37.9% to $64 million, or 31 cents per diluted share.

Full Year Results
Full year sales fell 2% to $2.8 billion, which also benefited from price increases but declined due to lower volumes and negative currency headwinds for the entire year. Similar dynamics to the fourth quarter impacted the full year, with lower operating income from the corporate actions easily offset by lower interest and income tax expenses. The end result was a 1.4% boost in net income to $399.6 million, though increased shares outstanding served to send earnings down 14.2% to $1.99 per diluted share.

Mead Johnson expects to report diluted earnings for the coming year between $2.07 and $2.17 per share, which will include 23 cents in building out IT systems to fully function as an independent company. Analysts currently expect full-year sales growth of 8% to $3.1 billion and earnings from non-GAAP adjusted operations of $2.40 per share.

Bottom Line
Based off forward guidance, shares of Mead Johnson are currently trading at a forward P/E of approximately 16.75 times, which is a rich valuation given there is some uncertainty as Mead breaks off on its own and must spend to establish internal IT systems and its own sales force across the globe. However, the company is a leader in its industry, which is also served by Nestle (OTCBB:NSRGY) and Danone (OTCBB:DANOY). As such, Mead Johnson is the only pure-play option to gain exposure to the stable pediatric nutritional market. (Learn how to filter out the noise of the market place in order to find a solid way of determining a company's value. Read Equity Valuation In Good Times And Bad.)

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