Mead Johnson (MJN) Tops Q3 Earnings, Lags Sales, Guides Low

Mead Johnson Nutrition Company (NYSE:MJN) reported third-quarter 2016 results with adjusted earnings per share (EPS) of 87 cents beating the Zacks Consensus Estimate by a penny. Also, adjusted earnings improved from the prior-year quarter figure by 8.8%.

Including the impact of certain one-time items, reported net earnings were 80 cents per share, up 3.9% year over year.

Net Sales

Net sales in the reported quarter grossed $937.5 million, down 4% year over year (flat year over year at CER, or constant exchange rate). The top line missed the Zacks Consensus Estimate of $938.4 million.

Sales in the reported quarter were adversely affected by 5% lower volume and 4% unfavorable foreign exchange rate. However, third-quarter sales were positively impacted by 5% due to favorable price mix.

Segments in Detail

Currently, the company has three reportable segments – Asia, Latin America and North America/Europe.

Sales in Asia (representing 49% of total sales) declined 3% year over year (flat at CER) to $463.2 million. While poor volume affected this segment’s revenues by 4%, unfavorable foreign exchange rate impacted sales by 3%. However, China experienced strong sales growth, reflecting positive momentum from new product launches and recovery of prior-quarter customs clearing delays. However, sales in other Asian markets, including the Philippines, were hampered by continued adverse market dynamics.

In Latin America (17%), sales declined 13% year over year (flat at CER) to $160.6 million. Foreign exchange hurt growth in this segment by 13%, primarily in Argentina and Mexico. Volume dented sales by 10%. However, positive pricing gains in the overall segment offset volume losses and suspended shipments into Venezuela. Excluding the impact of suspended shipments into Venezuela, constant currency sales growth was 5%.

In North America/Europe (34%), sales dipped 1% to $313.7 million, on account of foreign exchange and volume marring sales growth by 1% and 5%, respectively. Within this segment, the company experienced continued market share weakness in the U.S. and increased competitive activities. However, its market share position strengthened in Canada in the reported quarter.

Margins

Adjusted gross margin at CER during the reported quarter was 66.1%, up 120 basis points (bps) on the back of lower dairy input cost.

Adjusted operating margin improved 60 bps year over year to 27.4%, on account of a drop of 12.1% in adjusted selling, general and administrative expenses, an increase of 3.9% in advertising and promotion expense, and a squeeze of 12.2% in research and development expense.

Balance Sheet and Cash Flow

Mead Johnson exited the quarter with cash and cash equivalents of $1.84 billion, compared with $1.72 billion in the previous quarter. Long-term debt was $3.01 billion, a slight drop from $3.02 billion during the second quarter. Year to date, the company generated operating cash flow of $510.7 million, compared with $608.9 million in the year-ago quarter.

Updated Guidance

Mead Johnson updated its guidance for 2016. The company now expects to deliver adjusted EPS of $3.43–$3.50, based on the current exchange rates, a significant decline from the earlier provided band of $3.48–$3.60. Meanwhile, the Zacks Consensus Estimate for EPS is pegged at $3.50, in line with the upper end of the guided range.

The company has reduced its revenue guidance as well and now expects year-over-year net sales to be 6%–7% below the prior year at CER (0–2%). The Zacks Consensus Estimate for revenues lies at $3.80 billion.

Our Take

Mead Johnson’s third-quarter results were a mixed bag, with the bottom line beating the Zacks Consensus Estimate and the top line missing the same. Actually, the company’s sales were quite poor, with all of its segments delivering a bleak performance on the whole.

In emerging markets, macroeconomic turmoil in Brazil, Venezuela and Argentina spoiled overall growth. Foreign currency also remained a major challenge for the company across all regions. On a brighter note, lower dairy input costs boosted gross margin at CER. The company’s Fuel for Growth project also played a major role in improving profitability.

Zacks Rank & Key Picks

Mead Johnson currently has a Zacks Rank #4 (Sell). Some of the top-ranked stocks in the broader medical space include GW Pharmaceuticals plc (NASDAQ:GWPH) , Quidel Corp. (NASDAQ:QDEL) and Baxter International Inc. (NYSE:BAX) . GW Pharmaceuticals sports a Zacks Rank #1 (Strong Buy), while Quidel and Baxter carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

GW Pharmaceuticals surged 69.6% year to date compared to the S&P 500’s 4.67% over the same period. The company’s four-quarter average earnings surprise is 41.7%.

Quidel rallied 23.5% in the past one year, higher than the S&P 500’s 2.35%. Over the next five years, the stock is estimated to record earnings growth rate of 20%, higher than the industry average of 15.1%.

Baxter’s shares soared 24.4% year to date. Over the next five years, the stock is expected to see 12.3% earnings growth. It has a trailing four-quarter average earnings surprise of 27%.

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