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Foolish First Look: Mead Johnson Nutrition

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Here at The Motley Fool, we love a hot IPO just as much as the next investor. Remember Google (Nasdaq: GOOG  ) in 2004? Or how about when Visa (NYSE: V  ) went public last year and soared 42% in the space of a week? If you're looking to "get in on the ground floor" of a new stock issue, there's no better time to do that than on the first day of trading.

But here's the thing about IPOs: For some time after they go public, investors are at a loss as to what to do with 'em. Take this week's hottest IPO, for example -- Bristol-Myers Squibb (NYSE: BMY  ) spinoff Mead Johnson Nutrition (NYSE: MJN  ) . The stock's been listed for more than 24 hours. It's got 30 million shares in circulation, and a brand-spanking-new $26.43 stock price. But up until just a few hours ago, Yahoo! Finance didn't even know it existed. And as for advice from Wall Street's best and brightest? Don't hold your breath.

For at least a month post-IPO, most professional stock analysts are stuck in a quiet period, unable to utter a peep about the stock. Until that gag order is lifted, we're on our own.

Thank goodness
Personally, I think this is a blessing for individual investors. Experience shows that Wall Street's Wise Men are prone to overconfidence, jumping to conclusions, and taking occasional lemming-like jumps all the way over the cliff. Worst of all, our two-years-long-and-still-going inquiry into their performance on Motley Fool CAPS shows conclusively that many of Wall Street's best and brightest aren't much more accurate than a coin flip.

But hey, opinions differ.

Plenty of people still do listen to the Street, a fact evidenced by today's stock-price bumps at Northrop Grumman (NYSE: NOC  ) , Garmin (Nasdaq: GRMN  ) , and Level 3 (Nasdaq: LVLT  ) -- each of which received a coveted analyst upgrade this morning. And that's OK. Fact is, while it's true that most analysts underperform the market, a precious few do earn their keep (Barclays Capital, Banc of America Securities, and Stifel Nicolaus being a few of the good 'uns). But just like the bad analysts, the good ones are keeping mum today.

Survey says ...
In Wall Street's absence, CAPS has stepped in to fill the gap. Twelve brave Fools have already rushed in where the Wall Street wise men are unable to tread. Their verdict: Mead Johnson's a bum. A loser investment. It’s been public for less than 48 hours, but CAPS has already tried Mead Johnson and found it wanting at this time. Here's a small sampling of what the 12 investors who've so far chimed in on the new stock have to say about it:

  • CAPS All-Star OklaBoston admires Mead Johnson's gumption in floating an IPO "during a bear market such as we're enduring now in February, 2009," but warns that such a move "can also indicate that the company going public is desperate to raise cash any way it can, which is NOT a good thing. Considering that stocks with less than 30 weeks of trading history tend to be lousy investments even in bull markets."
  • Fellow Fool TMFTom7, however, begs to differ. Tom likes the stock, pointing out: "Babies gotta eat!"
  • Why, even I have penned a few thoughts on the stock. Click over to the comment from TMFDitty (that's me) and you'll read these pessimistic thoughts on the IPO: "Taking a first cut at the new IPO, I get 30 million shares x a $26.40 share price = $790 million initial float. [Bristol-Myers] is keeping 85% of the company, so call the total market cap 7x that, or $5.5 billion. Tack on $2 billion in debt, and we've got us here a $7.5 billion company with roughly $380 million in trailing free cash flow -- so an EV/FCF of 20. I'd want to see the company growing at 20%-plus to justify that price. But according to Capital IQ, its actual profits growth rate over the last three years has been something closer to 5%. In short, I'll pass."

Foolish takeaway
Put it all together, mix well, and churn it through Motley Fool CAPS' investing supercomputer, and we come to the conclusion that Mead Johnson Nutrition is a one-star stock only -- a below-average issue at best, and a dog of a stock at worst.

That said, the day's still young, and the sample size is exceedingly small. Now's the time for you to rock the vote. Click on over to Motley Fool CAPS and tell us what you think about Mead Johnson Nutrition.

Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 584 out of more than 125,000 members.

Garmin is a Motley Fool Global Gains recommendation. Google is a Motley Fool Rule Breakers selection. The Fool has a disclosure policy.

Read/Post Comments (1) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 12, 2009, at 5:14 PM, valuedig wrote:

    Your presentation of the data is WRONG.

    Total shares outstanding: 204mm

    Debt: 1.75bb

    Cash 250mm

    204 x 26.4= 5385mm plus 1750mm less 250mm= 6885mm EV.

    And pre tax cash flow (after cap ex) is 375mm for 9 months 2008 and implies 12 month of 500mm

    You should read a prospectus.

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