The Chinese government's determined efforts to improve food safety have, on the one hand, resulted in healthier products for consumers at large. On the other hand, they have wreaked havoc on foreign companies trying to sustain themselves in the market. With Meiji Holdings, Japan's biggest dairy company, the first victim of the stringent norms and several other foreign manufacturers fined on charges of price fixing, the Chinese market, though potentially a gold mine, looks too dangerous to be ventured further into. However, amid all this turmoil Mead Johnson Nutrition (MJN) is refusing to budge. The company stood its ground to make sure that the antitrust review of its infant formula was resolved in the third quarter.
An overall strong show
The third quarter saw sales head north by 14% compared to the prior year period with a 65% gross margin. The latter, however, is admittedly not sustainable due to increasing dairy prices. The company has made it very clear that its products meet all the necessary standards, and it is ready to comply with any other regulations that may come its way. Such an approach only reinstates the company's positive outlook toward its growth in the Chinese market.
The Asia/Latin America market, which contributed nearly 73% of total third quarter revenue for Mead Johnson, also delivered a strong performance with double digit growth. The quarter also saw progress in the North America/Europe market, with sales rising by 2% and the EBIT margin increasing by 360 basis points to 21.8%. Riding on such revenue figures, the company raised its earnings per share guidance to $3.30-$3.37 .
A word on the competitors
Mead Johnson Nutrition focuses only on paediatric nutrition, unlike competitors at home like the French giant Danone (DANOY -0.86%) and the Swiss stalwart Nestle (NSRGY -1.55%), both of which are food and beverage companies at large. Danone suffered a greater impact than it had expected due to the recall of its baby milk products from several key Asian markets, including China. Its shares fell 4.3%, and the company lowered its full year sales growth to 4.5%-5%. A weakened economy at home directly affecting consumer demand has not helped its cause either.
Danone too could not stay away from the milk related scandal in China and took a hit, facing allegations for adopting inappropriate marketing strategies to boost sales . Nestle still remains the competitor to watch out for. It has a much larger market presence than Mead Johnson, and has been expanding in China since its 2011 purchase of a 60% stake in Yinlu Foods Group Co. In addition, it already has a presence in the Indian market, which is another potential gold mine yet to be explored. With a strong affinity toward dividend payments and no major acquisitions in the immediate future, Nestle also remains a favorite in this sector.
Final takeaway
With the basic fundamentals in place and record demand generating investments in emerging markets, Mead Johnson's legal issues should not be of much concern to investors. Export restrictions still persist in China, but with time the market is bound to be liberalized. With growth in the key Asian/Latin American markets and steady progress in the remaining economies coupled with the resolution of legal issues in China, Mead Johnson looks like a strong long-term buy.
