Buy into China’s Baby Boom

11/23/2011 12:38 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

2012 is the year of the dragon. Because the dragon—the icon of China’s emperors—symbolizes power and wealth, families in China see children born in a dragon year as especially fortunate.

Dragon years, historically, produce a mini baby boom, with about 5% more children born in a dragon year. Add that to the echo from China’s own baby boom and the loosening of government restrictions on family size, and China is projected to see increasing birth rates that peak around 2016.

That’s led to a stock-market boost in the shares of companies that are likely to tap into the baby bump. Chinese companies such as Inner Mongolia Yili Industrial Group (baby formula), Hengan International Group (baby diapers), and Boshiwa International Holding (retailer of kids clothes) have been tagged by China-based analysts as beneficiaries of the baby bump.

But I think Mead Johnson Nutrition (MJN) is an even better bet. Because of repeated scandals when toxic chemicals were discovered in powdered milk and baby formula produced in China —three years ago, tainted formula killed six infants—many Chinese consumers prefer overseas brands made by Mead Johnson and France’s Danone (DANOY).

China’s baby food market is projected to grow by 22% in 2011 to $11 billion, and to double by 2015, according to Euromonitor International. As household disposable income rises in urban areas—and per-capital disposable income in those areas rose 8% in 2010—more Chinese families are able to afford the higher prices of overseas products.

In 2010, Mead Johnson led China’s infant formula market with an 11.7% share. Danone was No. 2 at 9.8%.

Mead Johnson announced third-quarter earnings on October 27 that beat Wall Street projections, but then the company disappointed investors when it raised guidance to $2.73 to $2.78. That was up from previous guidance of $2.70 to $2.75 a share, but below the existing Wall Street projection of $2.79.

I think this gives you a chance to pick up this stock at a reasonable price near $70 to $71 a share. What you get for your money is a share of a company with a sales network that covers 250 Chinese cities (with another 50 scheduled to be added in 2012.)

About 24% of the company’s sales in 2010 came from China. That’s up from 16% in 2009.

As of today, November 23, I’m adding these shares to Jubak’s Picks with a target price of $79 a share by June 2012. The shares pay a dividend of 1.4%.

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, may or may not now own positions in any stock mentioned in this post. The fund did not own shares of 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 here.

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