Mead Johnson Nutrition Company (MJN) continues to benefit from growth in the emerging markets of Asia and Latin America, but growth has also been strong at home in the U.S.
The company recently reported better than expected results for the second quarter of 2011, driven by a 30% increase in sales in Asia and Latin America and a 10% increase in the U.S. and Europe.
Management also raised its guidance for full year 2011, prompting analysts to revise their estimates higher. MJN is a Zacks #2 Rank (Buy) stock.
Based on consensus estimates, analysts are projecting double-digit EPS growth over the next two years. On top of this growth, the company pays a dividend that yields 1.5%.
Company Description
Mead Johnson manufactures and distributes pediatric nutrition products primarily under its “Enfa” family of brands. The Enfa brand, including Enfamil® infant formula, is a global brand franchise in pediatric nutrition.
The company was founded in 1905 and is headquartered in Glenview, Illinois. It was spun-off from Bristol-Meyers Squibb (BMY) in 2009.
Second Quarter Results
Mead Johnson reported strong results for the second quarter of 2011 on July 28. Earnings per share came in at 72 cents, beating the Zacks Consensus Estimate of 69 cents. It was a 4% increase over the same quarter in 2010.
Net sales rose 22% year-over-year to $932.0 million, well ahead of the Zacks Consensus Estimate of $878 million. Excluding foreign currency effects, sales were up 18%, driven primarily by a 17% increase in volume.
The emerging markets of Asia and Latin America were a big growth driver for Mead Johnson, with sales rising 30%. Sales were also solid in North America and Europe too, rising 10% year-over-year.
The gross margin expanded 120 basis points over the second quarter in 2010 as higher volumes more than offset higher commodity costs. Earnings before interest and taxes were up 22.8% over the same period.
Outlook
Management expects to face headwinds in the second half of the year due to “significantly higher commodity costs and more challenging comparisons with the prior year”. However, strong emerging market growth and market share gains in the U.S. are expected to drive earnings higher.
Management actually raised its earnings guidance for 2011 in the second quarter press release. It now expects to earn between $2.70 and $2.75 per share, up from previous guidance of $2.62-$2.70.
Analysts revised their estimates higher for both 2011 and 2012, sending the stock to a Zacks #2 Rank (Buy). The 2011 Zacks Consensus Estimate is now $2.73, representing 13% growth over 2010 EPS. The 2012 consensus estimate is currently $3.16, corresponding with 16% EPS growth.
Fundamentals
Mead Johnson generates strong free cash flows and has raised its dividend twice since going public in early 2009. It currently pays a dividend that yields 1.5%.
Shares trade at 26.2x forward earnings, a premium to the industry average of 20.1x. This doesn’t appear to be unreasonable, however, given the company’s growth potential – especially in the emerging markets.
Its price to sales ratio of 4.2 is also higher than its peers at 2.5, but this appears justified given its fat profit margins. The company’s net margin over the last 12 months was a stellar 14.0%, well above the industry average of 7.6%.
The Bottom Line
Demand in the emerging markets and the developed economies of the U.S. and Europe continues to drive sales growth and margin expansion for Mead Johnson. With double-digit EPS growth forecasts over the next two years, and both analysts and management raising their earnings projections, MJN doesn’t seem quite so pricey after all.
Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research.
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