Update Mead Johnson Nutrition (MJN)

12/23/2011 1:49 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

There’s nothing more heartbreaking and shocking than the death of a child.

Shares of Mead Johnson Nutrition (WMT) dropped like a stone yesterday—the stock was down 10% for the day—and has dropped another 5% today as of 1:15 p.m. New York time—on news that an infant given the company’s Enfamil baby formula had died from a bacterial infection and that Wal-Mart (WMT), Kroger (KR), Walgreen (WAG), and Supervalue (SVU) had pulled cans of the product from their shelves.

The markets are operating on a dearth of information and an abundance of rumors. Initial news reports called Wal-Mart’s action a “product recall.” It isn’t. It’s a voluntary decision by Wal-Mart to take the product off its shelves. The U.S. Food & Drug Administration has launched an investigation into the infant death, but won’t have a result for a week or so. (Mead Johnson Nutrition is a member of my Jubak Picks portfolio http://jubakpicks.com/ )

The baby, in Lebanon, Missouri, tested positive for Cronobacter, a bacteria that can cause serious illnesses in newborns. The company tested the batch used by the child’s family when it was produced and when it was packaged with no signs of bacterial contamination in either test. The company has also now tested the batch again after the child’s death and found no evidence of the bacteria.

Enfa brands—which include Enfamil--account for a majority—79%--of Mead Johnson Nutrition’s sales. A second child in Missouri has been reported sick with the same bacteria. That child recovered and although that child is known to have consumed formula, at this point no one knows what brand was involved.

And right now it’s unclear if the bacteria were in the formula as manufactured or sold, or were introduced into the formula when it was prepared for the child, perhaps from a water source.

And we won’t know until the FDA completes its investigation.

At this point I think there are three possible scenarios for the stock.

First, the FDA investigation discovers that the formula wasn’t the source of the bacteria, and clearly identifies another source. In this case I think the effect on the stock and on company sales is minimal.

Second, the FDA concludes that the batch was clean, but other stores follow Wal-Mart and Supervalu’s lead anyway and consumers switch to other brands. Credit Suisse estimates this would result in a loss of about 2 percentage points of market share over the course of a year and a decline of about 6% in the company’s stock. (Credit Suisse based this and the next scenario on a comparison with the recall last year of Abbott Laboratories Similac formula.)

Third, the FDA discovers bacteria in the batch of formula and evidence that it wasn’t introduced by the child’s family. The problems for Mead Johnson drag on, sales drop costing the company 6 percentage points in market share. The shares fall by about 16%.

With the stock down 15% yesterday and today, the market is clearly discounting pretty much all of the worst-case scenario created by Credit Suisse. I certainly wouldn’t recommend buying on the drop—we simply don’t know enough for that. But investors should also recognize that markets have quickly moved to price in much of the worst-case scenario.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did not own shares in Mead Johnson Nutrition as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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