"Mommy, my milk tastes funny."
"Oh don't worry sweetie, that's just the beetle larvae. They pose no immediate health risk."
Lack of a health risk or not, Abbott Labs (NYSE: ABT) is trying to avoid the above conversation. Yesterday, it announced a recall of some types of its Similac baby formula because it found beetles and their larvae in an area of one of its plants.
The recall of "fewer than 5 million units," according to Reuters, will cost the company $100 million, but Abbott isn't changing its earnings guidance for the year. The company is large and diversified enough that the $100 million in lost revenue isn't a major financial issue.
Of course, like Johnson & Johnson's (NYSE: JNJ) and Boston Scientific's (NYSE: BSX) recalls this year, it isn't so much about the money as it is the reputation of the brand. If consumers are worried about the cleanliness of plants that make Similac, will they shun Similac in favor of other brands of baby formula? The big winners could be Mead Johnson Nutrition (NYSE: MJN), which was spun off from Bristol-Myers Squibb (NYSE: BMY) last year, as well as Nestle, whose shares trade in Switzerland.
Of course, if Abbott plays its cards right, it's possible to come out of this with minimal damage. The company has other plants that aren't infested with beetles that can make up for the lost production while it gets things cleaned up. If management can spin this the right way -- "we're looking out for the best interest of your children" -- Abbott could come out of this relatively unscathed.
The big question investors have to ask is whether this is a one-time issue, or a sign of quality control issues at Abbott that could mimic Johnson & Johnson's ongoing problems. Abbott discovered the issue during routine quality checks, so perhaps bugging out isn't necessary quite yet.
Adam Wiederman suggests going against the herd, even if the herd contains hedge funds.
