Introducing Mead Johnson Nutrition
05 November, 2015
For those of you who attended our roadshow you will recall the investment case we presented for Mead Johnson Nutrition — deciding not to include it in our International share portfolio. Senior Investment Analyst Ashley Gardyne explains why we have now decided to add this company to the portfolio.
Who is Mead Johnson and what do they do?
Mead Johnson is a US listed market leader in the growing global market for infant formula and nutritional drinks for children. The infant formula sector has been on our radar for some time and Mead Johnson is a business we have followed closely since first meeting them in mid-2014.
Mead Johnson's Enfamil product range is a leading brand franchise in paediatric nutrition. Its portfolio of over 70 products is marketed in more than 50 countries and is designed to address the nutritional needs of infants, children, and expectant and nursing mothers. Over 70% of Mead Johnson's revenue is generated in Asia and Latin America where infant formula usage is still low and growing rapidly.
A defensive industry with high barriers to entry
One of the attractive aspects of the infant formula market is high barriers to entry. The industry is dominated by Mead Johnson, Danone, Nestle, and Abbott Labs, and when one or two players have critical mass in a particular geography it is very difficult for competitors to gain a foothold. With scale, incumbents can leverage manufacturing and distribution costs and the resulting higher profitability allow marketing budgets to make life difficult for new entrants. You can see this effect in New Zealand where Danone and Nestle have over 90% market share between them.
Infant formula is a consumer staple product and generally isn't economically sensitive. This combined with strong industry growth provides Mead Johnson with a growing yet defensive revenue stream.
Mead Johnson grew its revenue and earnings per share at 9% p.a. and 12% p.a. respectively over the last five years, while also paying a healthy dividend yield. We expect continued strong growth in the infant formula industry, particularly in emerging markets, supported by increasing incomes, a growing female workforce participation rate, and an increasing shift to premium international brands (this last trend is particularly evident in China as locals are skeptical of local food safety standards). The long runway for growth can be illustrated by the fact that infant formula consumption is 12kg per birth on average in Latin America, compared with 42kg per birth in the US.
What was the trigger for investing now?
Mead Johnson's share price weakened 30% in the first nine months of the year due to general concerns about the health of emerging market economies. An apparent increase in competition in the infant formula industry in China also weighed on the share price. Our research indicates that concerns regarding price discounting in China are overblown, with this behaviour resulting from short-term overstocking in the supermarket channel and product labeling changes in China that required old stock to be moved. We believe these factors are likely to be temporary and do not materially impact the strengths of Mead Johnson's business or its growth trajectory. In our view the share price has over-reacted and we have used this period of weakness to initiate a position.