For Mead Johnson, Prices Are Stabilizing (And That's Good For Investors)

• BMO Capital Markets upgraded shares of Mead Johnson Nutrition CO MJN to Outperform on Thursday.
• However, the firm decided to trim its price target by $10.00, to $89.00.
• Shares of Mead Johnson are up more than 3.5 percent on Thursday trading.

In a report issued Thursday, BMO analystAmit Sharma upgraded shares of Mead Johnson from Market Perform to Outperform on the back of the expectation of price stabilization in China, coupled with recuperating volumes and margins in North America. This should help restore the stock’s valuation premium versus its “structurally lower growth packaged food peers.”

Impact & Analysis

According to the note, large price discounting in Mainland China would generate pressure on the company’s operating results for the second half of the year. However, analysts at BMO think that the likely reduction in sales growth and/or EPS guidance and downward revisions to estimates are already reflected on the current stock price.

More importantly, they add, the firm’s analysis of formula pricing in the Chinese Internet channel reveals that main players, with the exception of Danone, Nestle, and Beingmate, have replaced excessive discounting with “surgical, time-based promotions.”

In fact, Sharma notes, “Mead’s recently launched fully imported formula, along with similar offerings by others, is being sold largely at list prices, while maintaining a solid price premium vs. Danone’s discounted fully imported formula and lower-priced locally produced products.”

Although large discounts may persist in China’s brick-and-mortar stores in the near-term, BMO expect pricing discipline to return as:

1) The deflation in global dairy prices seems to be moderating, thus making difficult for companies to offer deep discounts.

2) “Likely adoption of new regulations in China (limiting the number of brands and formulations sold by domestic producers), which would curtail channel stuffing by domestic producers.”

Even in spite of the small sample size, BMO’s pricing checks should considerably mitigate investors’ “concerns of a structural shift to a lower-price/lower-margin environment in China and restore confidence in MJN’s attractive growth outlook,” the analysts conclude.

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.