Hedge Fund Managers Greenblatt and Soros Are Betting On Mead Johnson Nutrition
In this article, let's take a look at Mead Johnson Nutrition Company (MJN), a $18.56 billion market cap company that manufactures, distributes and sells infant formulas, children's nutrition and other nutritional products.
Attractive markets
The company is a key player in the pediatric nutrition space and operates in the infant (Enfamil), specialty (Nutramigen), and child (Enfagrow) nutrition categories. Well-known brands as well as emerging markets constitute competitive advantages over its peers. More than two-thirds of the company's sales came from Asia and Latin America, which means that it is in a good position to benefit from greater incomes in those markets.
Brand asset
Further, we believe that the firm will continue achieving economic returns in mature markets. Strategic moves in promising markets, like India, could be in the future a growth driver due to the possibility of wages rising and a growth in female labor participation, as well as a growing demand. These two things (wage growth and more women working) have an impact on the middle class that it is supposed to grow and would want to demand pediatric products of recognizable brands, paying a premium to reach those products.
People want the best for their children's development so branded products provide a quality differential, considering that people are less trusting of local brands. We believe management could trail wage increases and the growing population in order to consolidate in these markets, maximizing its prices.
Child nutrition category
Looking now at growth drivers in the U.S., we can think that the child nutrition category is somewhat underdeveloped in the U.S. when compared to the participation in sales in Asia and Latin America.
Other countries
The firm reinvests cash flows in demand generation projects with good results because they generated double-digit revenue growth over the past years. We can mention the expansion into new markets and building a new spray dryer in Singapore for example.
Revenues, margins and profitability
Looking at profitability, revenues grew by 5.28% but earnings per share remained flat in the most recent quarter compared to the samequarter a year ago ($0.82). During the past fiscal year, the company increased its bottom line. It earned $3.30 versus $2.96 in the previous year. This year, Wall Street expects an improvement in earnings ($3.72 versus $3.30).
The company made returns on invested capital above 70% (on average) since its split-off from Bristol-Myers. Finally, let�s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
Ticker | Company | ROE (%) |
MJN | Mead Johnson Nutrition | 240.99 |
GIS | General Mills Inc | 26.31 |
KRFT | Kraft Foods Group Inc. | 48.31 |
K | Kellogg Co | 56.94 |
CAG | ConAgra Foods Inc | 11.71 |
Industry Median | 8.33 |
The company has a current ROE of 240.99% which is higher than the industry median and its peers: General Mills (GIS) and ConAgra Foods (CAG).In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Kraft (KRFT) and Kellogg (K) could be the options. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 29.6x, trading at a premium compared to an average of 22.1x for the industry. To use another metric, its price-to-book ratio of 46.62x indicates a premium versus the industry average of 1.9x while the price-to-sales ratio of 4.69x is above the industry average of 1.04x.
As we can see in the next chart, the stock price has an upward trend in the five-year period.
Final comment
We believe the company can continue increasing market share in the global pediatric nutrition category, becoming a leader in areas where other brands are still out of reach of much of the population.
In the future, Mead Johnson has to be strategic in prices policies to raise them at a rate that trails wage increases.
Further, the tremendous return on equity that significantly exceeds the industry average make me feel bullish on this stock.
Hedge fund gurus like Louis Moore Bacon (Trades, Portfolio), Jim Simons (Trades, Portfolio), David Rolfe (Trades, Portfolio) and Robert Karr (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014, as well as Pioneer Investments (Trades, Portfolio).
Disclosure: Omar Venerio holds no position in any stocks mentioned
This article first appeared on GuruFocus.
