Mead Johnson Tops Q3 Earnings & Revenues, Retains View - Analyst Blog

Mead Johnson Nutrition Company (MJN), a renowned provider of pediatric nutritional products, reported third-quarter 2014 results with adjusted earnings per share (EPS) of 93 cents, beating the Zacks Consensus Estimate by 2.2%.

However, the bottom line was flat compared to the prior-year quarter number. Including the impact of certain one-time items, reported net earnings came in at $187.6 million or 92 cents per share, up 95% year-over-year (y/y) for both the figures, respectively.

A rise in the quarter's sales coupled with lower effective tax rate contributed to the year-over-year EPS growth.

Revenues in Detail

Revenues in the reported quarter were $1.091 billion, increasing 4.2% y/y (up 7% at constant exchange rate or CER). The top line was also much ahead of the Zacks Consensus Estimate of $1.077 billion. Volume and price positively impacted sales in the reported quarter by 2% and 5%, respectively, which were partially offset by 3% unfavorable foreign exchange impact.

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

Sales in Asia (representing 51.5% of total sales) rose 2.7% y/y (up 3% at CER) in the quarter to $561.5 million on the back of 5% contribution from price. However, a decline in volume negatively impacted sales growth by 2% in this geographical segment in the reported quarter. In the reported quarter, the segment's growth was impacted by strong comparison, since back then, the company had benefited from competitors' supply disruptions in China.

In Latin America (20.4%), sales edged up 0.7% y/y (up 14% at CER) to $222.9 million. Despite a 4% contribution from volume and 10% from price, foreign exchange adversely impacted sales growth by 13%. Price increases in Venezuela and Argentina primarily contributed to the majority of this segment's price growth, which in turn benefitted the revenue growth.

In North America/Europe (28.1%), sales were up 9.9% (up 10% at CER) to $306.3 million.In this region, sales increased owing to contributions of 8% from volume and 2% from price. Sales growth in this segment was primarily driven by an expanding children's nutrition business and infant formula market share gains.

Margins

Adjusted gross margin during the reported quarter contracted by a massive 510 basis points (bps) to 60.1% with 3.8% decline increase in gross profit to $656 million. This deterioration in the third quarter's gross margin was primarily driven by higher dairy input costs, adverse foreign exchange and start-up expenses associated with the company's new spray dryer in Singapore.

Adjusted operating margin also contracted 440 bps y/y to 21.7%, on account of a 5.5% increase in selling, general and administrative expenses to $232.3 million, a 13.5% rise in research and development expenses to $27.8 million. However, advertising and promotion-related expenses decreased 3% to $158.9 million. However, arise in overall adjusted operating expenses induced the contraction in the year-over-year operating margin.

Balance Sheet and Cash Flow

Mead Johnson exited the quarter with cash and cash equivalents of $1.195 billion up from $1.051 billion at the end of fiscal 2013 and had long-term debt of $1.497 billion, up from $1.009 billion as of Dec 2013. As of Sep 30, 2014, the company generated operating cash flow of $564.6 million compared with the year-ago equivalent number of $592 million.                     

Guidance

Mead Johnson has reaffirmed its full year 2014 financial guidance. The company still expects its adjusted EPS to lie in the range of $3.65 to $3.72. The current Zacks Consensus Estimate for EPS is pegged at $3.71, which lies close to the upper limit of the company's guided range.

Moreover, the company expects 9% sales growth for the year at constant exchange rate. The current Zacks Consensus Estimate for 2014 revenues is pegged at $4.403 billion.

Our Take

We are impressed with Mead Johnson's promising third-quarter 2014 financial results which outpaced the Zacks Consensus Estimate on both lines. The company achieved positive sales growth in all of its three segments, although higher dairy cost remained a common factor which adversely impacted gross margins in each segment.

However, since Mead Johnson has retained its 2014 guidance, we believe the rising dairy costs will not affect the company's vital financials in the coming quarters to a considerable extent. The company also expects dairy input costs to moderate in the near future, which is believed to fuel positive growth in overall profit margins.

Moreover, management expects that its diverse geographic portfolio will allow the company to deliver continued solid revenue growth in the upcoming quarters.

Zacks Rank

Currently Mead Johnson hasa Zacks Rank #3 (Hold).

Some notable medical products stocks that warrant a look are Quidel Corp. (QDEL), ZELTIQ Aesthetics, Inc. (ZLTQ) and GW Pharmaceuticals plc (GWPH). All these stocks carry a Zacks Rank #1 (Strong Buy).