Food Processing Stocks

Mead Johnson Nutrition Valuation – June 2016 $MJN

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 10 Companies Benjamin Graham Would Invest In Today – March 2016.  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 stock analysis showing a specific look at how Mead Johnson Nutrition Co (MJN) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Mead Johnson Nutrition Company (Mead Johnson) is a pediatric nutrition company. The Company manufactures, distributes and sells infant formulas, children’s nutrition and other nutritional products. The Company operates through three segments: Asia, North America/Europe and Latin America. Its product portfolio includes routine and specialty infant formulas, children’s milks and milk modifiers, dietary supplements for pregnant and breastfeeding mothers, pediatric vitamins, and products for pediatric metabolic disorders. The Company’s Enfa family of brands, including Enfamil infant formula, is a 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 approximately 70 products to mothers, healthcare professionals and retailers in over 50 countries in Asia, North America, Latin America and Europe.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of MJN – June 2016

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $16,482,879,619 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.12 Pass
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 0.99% Fail
6. Moderate PEmg Ratio PEmg < 20 26.09 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 -25.67 Fail
Score
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 2.12 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 2.16 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

MJN value chart June 2016

EPSmg $3.35
MG Growth Estimate 5.08%
MG Value $62.46
Opinion Overvalued
MG Grade C
MG Value based on 3% Growth $48.56
MG Value based on 0% Growth $28.46
Market Implied Growth Rate 8.79%
Current Price $87.36
% of Intrinsic Value 139.87%

Mead Johnson Nutrition CO is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings growth over the last ten years, and the poor dividend history, and the high PEmg and PB ratios. The Enterprising Investor is only concerned with the level of debt relative to the net current assets. As a result, all Enterprising Investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $2.5 in 2012 to an estimated $3.35 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 8.79% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.

Mead Johnson Nutrition CO receives an average overall rating in the ModernGraham grading system, scoring a C.

Stage 3: Information for Further Research

MJN charts June 2016

Net Current Asset Value (NCAV) -$10.81
Graham Number $0.00
PEmg 26.09
Current Ratio 2.12
PB Ratio -25.67
Current Dividend $1.65
Dividend Yield 1.89%
Number of Consecutive Years of Dividend Growth 8

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Most Recent Balance Sheet Figures

Balance Sheet Information 3/1/2016
Total Current Assets $2,634,400,000
Total Current Liabilities $1,242,300,000
Long-Term Debt $3,012,600,000
Total Assets $4,016,800,000
Intangible Assets $170,500,000
Total Liabilities $4,652,200,000
Shares Outstanding (Diluted Average) 186,700,000

Earnings Per Share History

Next Fiscal Year Estimate $3.44
Dec2015 $3.27
Dec2014 $3.54
Dec2013 $3.19
Dec2012 $2.95
Dec2011 $2.47
Dec2010 $2.20
Dec2009 $1.99
Dec2008 $2.32
Dec2007 $5.84

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $3.35
Dec2015 $3.23
Dec2014 $3.10
Dec2013 $2.77
Dec2012 $2.50
Dec2011 $2.51
Dec2010 $2.51
Dec2009 $2.45
Dec2008 $2.33
Dec2007 $1.95

Recommended Reading:

Other ModernGraham posts about the company

Mead Johnson Nutrition Co Valuation – November 2015 Update $MJN
The Best Companies of the Food Processing Industry – October 2015
15 Best Stocks For Value Investors This Week – 8/22/15
Mead Johnson Nutrition Analysis – August 2015 Update $MJN
30 Companies in the Spotlight This Week – 5/23/15

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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