Last week, Bloomberg came out with an article suggesting Nestle (NSRGY, Financial) would not need to acquire Mead Johnson (MJN, Financial). Rather, the financial article suggested Nestle should focus on its faster-growing business segments and sort out its health science segment, where sales have been slowing.Ă‚
As indicated by Bloomberg, shares of Mead Johnson have fallen almost 20% since July because the company was overlooked by Danone (XPAR:BN, Financial) when it decided to acquire WhiteWave Foods (WWAV, Financial) for $12.5 billion instead.
Despite this slump in share price, valuations indicate Mead Johnson is selling at a good premium to its peers.
According to GuruFocus data, the company has a trailing price-earnings (P/E) ratio of 27.3 times, compared to 20 for its peers, and price-sales (P/S) ratio of 3.7 times, compared to 1 for its peers. Mead Johnson also had a trailing dividend yield of 2.21% with a 61% payout ratio and a 2.7% share buyback ratio.
Earnings performance
On Oct. 27, the $13.8 billion packaged goods company delivered its third-quarter fiscal 2016 results. Mead Johnson demonstrated declining sales and earnings figures for its nine-month fiscal 2016 operations. The company delivered -8.5% to $2.84 billion in overall sales and -28.2% to $377.1 million in profits.Shares of Mead Johnson went down by 7.3% that day, while the Standard & Poor 500 Index moved relatively flat with a -0.3% change.
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"We continue to make progress against our global plan," CEO Kasper Jakobsen said. "Most critically, we have made substantial progress in China. We are operating in a challenging global environment and it is now clear that our growth will occur more slowly than we had planned. In this environment, we have chosen to revise our full year guidance for both top and bottom line numbers."Ă‚
Mead Johnson is to report its next quarterly earnings on Jan. 26, according to Nasdaq.
Outlook
Mead Johnson expects -6% to -7% net sales growth due to "market share weaknesses in several markets, notably in the U.S., as well as continued macroeconomic challenges in several emerging markets." In addition, the company expects its GAAP (generally accepted accounting principles) earnings per share to be between $2.8 to $2.87, down from $3.27 in fiscal 2015.
(10-K, Mead Johnson)
Market performance
Mead Johnson has underperformed both its peers and the broader Standard & Poor 500 Index in recent years. According to Morningstar data, Mead Johnson had one- and five-year total returns of 12.5% and 2.2%, while the broader index had returns of 24.9% and 14%.
(10-Q)
Mead Johnson
Mead Johnson Nutrition Co. was founded 111 years ago and introduced its first infant feeding product, Dextri-Maltose, in 1911. Currently, Mead Johnson is a global leader in pediatric nutrition.
According to its filing, Mead Johnson’s Enfa family of brands, including Enfamil infant formula, is the world’s leading brand franchise in pediatric nutrition, based on retail sales, and accounted for approximately 80% of its net sales in fiscal 2015.
Mead Johnson operates in over 50 countries, including Asia, North America, Latin America and Europe. Mead Johnson has three reportable segments: Asia, North America and Europe and Latin America.
(10-Q and 10-K Filings, Mead Johnson)
Asia
In fiscal 2015, Mead Johnson’s Asia segment sales had a -10.5% change, down to $2.04 billion from $2.28 billion the year prior, while contributing to half of total Mead Johnson sales for the period. Asia sales also had earnings before interest and income taxes (EBIT) margin of 33%.
Nine months into fiscal 2016, Asia sales still had a poor performance with a -9.6% change while delivering an EBIT margin of 31%, compared to 33% year on year.
North America and Europe
Business in North America and Europe also experienced near flat growth, 0.9%, to $1.28 billion in fiscal 2015. The segment contributed 31.3% to total Mead Johnson sales and had an EBIT margin of 28%.
Nine months into fiscal 2016, segment sales for the group delivered -1.3% growth and had an EBIT margin of 31%, compared to 28% the year prior.
Latin America
The Latin America segment also suffered poor performance in fiscal 2015 with a -12.7% change in overall sales, down to $757.1 million from $867.5 million the year prior. The segment contributed 18.6% of total sales and had a 23% EBIT margin.
Nine months into fiscal 2016, Latin America business sales went further downhill with a -17% change and had an EBIT margin of 24%.
Overall, Mead Johnson had five-year sales, profit growth and operating margin averages of 5.3%, 7.6% and 22.3%.
Cash, debt and book value
As of September, Mead Johnson had $1.84 billion in cash and $3 billion in debt. Mead Johnson also had a total equity deficit and book value of -$438.7 million for the period, compared to $352 million the year prior. Lastly, 3.8% of Mead Johnson’s $4.19 billion assets are identified as goodwill and intangibles.
Cash flow
(10-Q, Mead Johnson)
Nine months into fiscal 2016, Mead Johnson had a -16% change in its cash flow from operations and was down to $510.7 million.The company still had weak growth in cash flow provided that it already had a positive cash inflow of $45.9 million for the period compared to none the year prior.
Capital expenditures were $110.2 million, leaving Mead Johnson with $400.5 million in free cash flow compared to $483.7 million year on year.
The packaged foods company did not issue any debts for the recent period while having allocated 58%, or $232.3 million, of its free cash flow in dividends. On average, Mead Johnson allocated 121% of its free cash flow in both dividends and share repurchases.
(10-Q and 10-K Filings, Mead Johnson)
As observed, Mead Johnson allocated a good amount, 243% or $1.79 billion, of its free cash flow in payouts in fiscal 2015. Share buybacks for that period climbed to $1.46 billion compared to $54.1 million in fiscal 2014.
Mead Johnson had a $500 million share buyback program in 2013. In October 2015, Mead Johnson approved a share repurchase program authorizing an additional $1.5 billion of its common stock. In the same month, Mead Johnson entered an accelerated share repurchase agreement with Goldman Sachs (GS, Financial) to repurchase $1 billion of its common stock.
Conclusion
Despite Mead Johnson’s profitable global business involving infant and pediatric nutrition, the company has struggled to grow its business in recent times –even revising its fiscal 2016 outlook.
Mead Johnson, nonetheless, took early steps to deal with this during the third quarter of 2015 by implementing its “Fuel for Growth” program. The Fuel for Growth program is designed to improve operating efficiencies and reduce costs, according to company's filings.
In observance, the program has yet to bear fruit as the operating margin since its implementation has actually dropped to 20.8% from 23.8% based off of Mead Johnson’s recent nine months of operations.
(Mead Johnson share price of $74.84 a share with trailing P/E ratio of 27.7 times, GuruFocus)
Last week, analysts at Berenberg rated Mead Johnson shares as a sell, while Deutsche Bank had a hold with a target price lowered to $78 a share from $85 back in late October.
Given Mead Johnson’s recent business performance accompanied by negative book value, the company’s shares are a pass.
Disclosure: I do not have shares in any of the companies mentioned.
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