Mead Johnson Nutrition Quarterly Valuation – July 2014 $MJN

logo (3)Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Undervalued Companies for the Enterprising Investor with High Dividend Yields.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Mead Johnson Nutrition (MJN) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Mead Johnson Nutrition Company (Mead Johnson) is a global pediatric nutrition company. The Company manufactures, distributes and sells infant formulas, children’s nutrition and other nutritional products. Its Enfa family of brands, including Enfamil infant formula, is the global brand franchise in pediatric nutrition. Its product portfolio addresses a range of nutritional needs for infants, children and expectant and nursing mothers. The Company markets its portfolio of more than 70 products to mothers, health care professionals and retailers in more than 50 countries in Asia, North America, Latin America and Europe. During the year ended December 31, 2011, it operated two segments: Asia/Latin America and North America/Europe, which consisted of 66% and 34%, respectively, of its net sales. In addition to the Enfa family of brands, the Company markets several other brands on a local, regional or global basis.
MJN Chart

MJN data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 2/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years - FAIL
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
  6. Moderate PEmg ratio – PEmg is less than 20 - FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years - PASS
  4. Dividend Record – currently pays a dividend - PASS
  5. Earnings growth – EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price $94.88
MG Value $49.44
MG Opinion Overvalued
Value Based on 3% Growth $45.29
Value Based on 0% Growth $26.55
Market Implied Growth Rate 10.94%
Net Current Asset Value (NCAV) -$4.48
PEmg 30.38
Current Ratio 1.59
PB Ratio 44.19

Balance Sheet – 6/30/2014

Current Assets $2,772,200,000
Current Liabilities $1,743,700,000
Total Debt $1,502,100,000
Total Assets $4,112,500,000
Intangible Assets $257,800,000
Total Liabilities $3,678,400,000
Outstanding Shares 202,200,000

Earnings Per Share

2014 (estimate) $3.59
2013 $3.20
2012 $2.97
2011 $2.49
2010 $2.21
2009 $1.99
2008 $2.32
2007 $5.84

Earnings Per Share – ModernGraham

2014 (estimate) $3.12
2013 $2.78
2012 $2.52
2011 $2.52
2010 $2.51
2009 $2.45

Dividend History

MJN Dividend Chart

MJN Dividend data by YCharts


Mead Johnson is suitable for Enterprising Investors but not for Defensive Investors.  The Defensive Investor is concerned with the low current ratio, poor earnings stability over the last ten years, short dividend history and the high PEmg and PB ratios.  The Enterprising Investor’s only concern is the high level of debt relative to the net current assets.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities. From a valuation side of things, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $2.51 in 2010 to an estimated $3.12 for 2014.  This low level of demonstrated growth does not support the market’s implied estimate of 10.94% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value well below the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Mead Johnson Nutrition (MJN)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Mead Johnson Nutrition (MJN) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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