) Zacks Rank #5 (Strong Sell), is a maker of pediatric nutrition
products. The company is known best for its baby formula
products like Enfamil. Mead Johnson's share price performance
has been starved by China's move to investigate price fixing in the
Chinese baby formula market. The company and its competitors
have been accused of breaching anti-monopoly laws.
Price cutting pressures margins:
In reaction to the probe, Mead Johnson has cut the price of its
formulas in China by 7% to 15%. The price cuts took effect by
. Its competitors have also reduced prices with Danone (
) and Nestle (
) reducing prices by 20% and 11% respectively.
The reduced prices are expected to weigh on margins,
and it could take some time for the company to enact productivity
measures to offset the price drop.
Earnings estimates are being cut:
The result of lower formula prices and margin pressure is a
reduction in the earnings outlook. In the last 30 days, six 2013
and seven 2014 earnings per share estimates have been
reduced. At the same time, the Zacks Consensus
Estimates for 2013 and 2014 have declined $.06 to $3.23 and $0.18
to $3.52 respectively. The graphic showing the
price of Mead Johnson and the trend in the consensus earnings
estimate is provided below to highlight the downward pressure on
earnings estimate revisions.
A downside surprise could be around the corner:
The Zacks Expected Surprise Predication suggests the company
faces a meaningful chance of disappointing investors with its
profit results. The Zacks most accurate EPS estimate
for 2013 is below the Zacks Consensus Estimate of $3.23 at $3.15.
There is a similar set up for the June quarter where Mead Johnson
is projected to earn $0.84 and the most accurate forecast argues
The company is not cheap:
Mead Johnson trades about 22x expected 2013 earnings per share,
and its PEG ratio is just below 2.0. The stock is priced for
growth, but the threat of disappointing profits and a weak trend in
earnings revisions may leave the stock at risk for a lower
multiple. Some in the market fear that the regulatory
headwinds in China have further to run. Historically, the PEG ratio
has ranged between 1.54 and 2.63.
Those looking for exposure to the health product space may want
to examine Resmed (
, Zack Rank #1 (Strong Buy) or Hanger (
, Zacks Rank #2 (Buy). These companies offer a stronger
formula for profits given their trend in earnings revisions.
HANGER ORTHOPED (HGR): Free Stock Analysis
MEAD JOHNSON NU (MJN): Free Stock Analysis
RESMED INC (RMD): Free Stock Analysis Report
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