Monday, July 16, 2012
Mead Johnson (NYSE:MJN): "Fear Of The Dragon" - Downgrading To Sector Perform - RBC
- RBC thinks MJN could miss Q2 sales estimate by about 5% and report a negative volume number.
According to the analyst, Ed Aaron the MJN story has become highly controversial in recent weeks as investors have begun to question the growth prospects for China, which in 2011 accounted for 29% of sales and about two-thirds of the company’s 17% sales growth. While Mead’s messaging on China has been incrementally more cautious for the past couple of quarters, investors’ interpretation of this message has changed in recent weeks, reflecting: 1) Mead’s presentation and discussion of China category growth and market share data at a competitor conference last month; 2) syndicated data showing decelerating growth; and 3) myriad data points indicating a broad-based slowdown in China consumer spending growth. Examples include McDonald’s, Nike, Coach, and Tiffany, to name a few.
Accurately assessing the rate of deceleration is exceedingly difficult coming off a period of such extraordinary growth. Last year, China/HK grew 45% and accounted for two-thirds of Mead's 17% sales growth. China/HK sales have more than doubled in the last three years.
Assessing the impact of slower near-term China growth on the Mead investment thesis requires an understanding of not only how much growth has slowed, but also why. If the slowdown is mostly a function of unusually tough comps and near-term distortion resulting from the double-digit price increase that went into effect in April, it would be viewed as more transitory in nature. To the extent that the slowdown reflects either growing macro weakness or changing competitive dynamics, it would present a bigger challenge to the investment thesis. RBC believes each of these factors is having an impact to some extent. They are inclined to believe that the more transitory factors are the most significant, but it’s difficult to assess the exact magnitude of each.
See risk to sales expectations. The firm thinks Mead could miss Q2 sales estimates by about 5% and potentially report a negative volume number for the quarter. While they still think full-year guidance is achievable, they are no longer convinced that guidance has upside.
Lowering estimates to incorporate slower China growth. RBC lowered their FY-12 and FY-13 estimates by $0.10 and $0.20 respectively, which takes them from above consensus to below consensus. Their China/HK organic growth assumptions include: +12% for 2Q12, +16% for FY-12, and +15% for FY-13.
Notablecalls: This is a potentially significant call that could send MJN stock down several points today and in the coming days.
- MJN is all about Asia and things appear to be cooling there.
- The stock trades at a +20x fwd P/E, which of course means it's expensive and needs to produce significant growth to justify the valuation.
- RBC is calling for a Q2 EPS miss. Again, I point out the +20x fwd P/E. If RBC is right and MJN produces a below-consensus # in 10 days the stock is going to be 10-15 pts lower (MJN is scheduled to report on Jul 26).
- MJN has been such an analyst darling (note RBC has been OP rated for ages) and once the tide turns it's going to hurt. The stock feels broken here.
I'm thinking to the tune of 2-3pts of downside today and possibly more toward low $70's ahead of Jul 26.
PS: I'm posting this after open. Use possible bounces to scale in.