Bucking the China Odds

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Financial analysts’ opinions may be divided on the fortunes of Mead Johnson (NYSE: MJN), with the company getting an upgrade to buy on momentum, while at the same time receiving a downgrade of the stock to neutral post rally. Nevertheless, it would be an astute move to have Mead Johnson in your portfolio. And here are some of the reasons why:

Agility in Adapting To Changing Market Conditions

Mead Johnson has shown how agile it is to adapt to a changing market environment in China. During the first half of 2012, price increases in its products, coupled with the aggressive competitor promotions took its toll on the company’s Chinese market share. Mead Johnson, however, recovered whatever ground it has lost in China in last year’s second half, a development which contributed to the company achieving better-than-expected results for the 2012 fourth quarter and for the full year.

Notably, China, with about 12 million births annually, is among the world’s largest markets for infant formula and baby food, accounting for about 23 percent of the estimated $41 billion global market. Despite its first half debacle, Mead Johnson sales in China and Hong Kong rose 5% to reach nearly$1.2bn in 2012, the company said.

Overall, the company reported a 6 percent increase in net sales for the year to $3.9 billion from the $3.6 billion posted in 2011. Combined sales of the company’s Asian and Latin American operations rose by 12 percent to partially recoup the 3 percent decline in Mead Johnson sale in North America and Europe. The company’s 2012 fourth quarter net earnings amounted to $134.2 million, or 66 cents per share, up from the $85.6 million, or 42 cents per share, achieved a year earlier. Shares of Mead Johnson jumped 11.5 percent following the announcement of these surprising sales and earnings results.

The president and chief executive officer of Mead Johnson, Stephen Golsby, discounted the aggressive promotions of its competitors in China. Golsby maintained that Mead Johnson prefers to build brand value rather than drive sales volumes via product promotions. He added that the company’s priorities in equity building and advertising activities are the things that will drive Mead Johnson’s future growth in China.

Growth Drivers in Latin America and the Rest of Asia

Mead Johnson’s management is also confident that the company’s Latin American operations will continue contributing a significant share to the company’s earnings during 2012. Noting that South America delivered the strongest growth among Mead Johnson’s regions in 2012, the company’s management said it believes that their Latin American revenue is “on track” to hit $1 billion by 2015.

The emerging markets in South America, as well as in Asia-Pacific, constitute a main arena for manufacturers of infant formula and baby food. In the twelve largest countries in these regions, it was estimated that the birth rates surpass the US pace by an average of 37.7 percent. This factor, along with rising urbanization and a growing middle class, indicates further growth in sales of infant formula in these emerging market areas.

In its South American operations, Mead Johnson has facilities in Columbia, Argentina, Brazil, Peru, Ecuador, and Venezuela. Besides China, the company also has operations in the Asian emerging markets of Malaysia, Indonesia, and Vietnam, as well as in Thailand and the Philippines where Mead Johnson has manufacturing facilities.

It is in China where Mead Johnson clearly established its superiority against Nestle and Pfizer (NYSE: PFE), two other major foreign players in the Chinese infant nutrition market. Pfizer last year divested its infant nutrition business and sold it to Nestle. The latter, in effect, was merely buying market share when it gained 9.8 percent slice of the Chinese market following the acquisition. Nonetheless, Nestle still trailed Danone and Mead Johnson in the Chinese infant formula market derby with market shares of 9.8 percent and 11.7 percent, respectively. As a result of its divestment, Pfizer’s adjusted earnings per share dropped 4 percent to 47 cents in the 2012 fourth quarter. In comparison, Mead Johnson EPS in the same quarter rose to 66 cents from 42 cents a year earlier.

Final Say

In summation, Mead Johnson appears a solid stock choice for this year. The company forecast 2013 earnings of $3.22 to $3.30 per share, excluding special items, and sales growth of between 6 percent and 7 percent. For this year, it will draw strength from operational improvements and cost controls that have been set in place, including those that enabled successful reduction of distributor inventory in China. 

ReniaBula has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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