Mead Johnson (MJN) Misses on Q2 Earnings, Beats Revs

Mead Johnson Nutrition Co. MJN reported second-quarter 2014 with adjusted earnings per share EPS of 88 cents, up 1.1% year over year. However, the bottom line missed the Zacks Consensus Estimate by a couple of cents. Apart from higher sales, lower effective tax rate contributed to the year-over-year EPS growth. However, including the impact of certain one-time items, reported net earnings came in at $171.4 million or 84 cents a share, down 0.3% and flat year over year, respectively.

 

 

Revenues in Detail

Revenues in the reported quarter were $1.111 billion, increasing 5.3% year over year (up 10% at constant exchange rate or CER). The figure was also ahead of the Zacks Consensus Estimate of $1.104 billion. Volume and price positively impacted sales in the reported quarter by 5% which was partially offset by 1% unfavorable foreign exchange impact.

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

Sales in Asia (representing 51.8% of total sales) rose 7.7% year over year (up 11% at CER) in the quarter to $575.6 million. Sales increased on the back of 6% contribution from volume and 5% from price. However, foreign exchange negatively impacted sales growth by 3% in this segment in the reported quarter.

In Latin America (20.2%), sales edged up 0.5% to $224.4 million. Despite a 6% contribution from volume and 8% from price, foreign exchange adversely impacted sales growth by 13%.

In North America/Europe (28%), sales were up 4.4% (up 4% at CER) to $311.1 million.In this region, sales increased owing to contributions of 1% from volume and 3% from price.

Margins

Gross margin during the reported quarter contracted 220 basis points (bps) to 61.5% with 1.6% increase in gross profit to $684.3 million. Operating margin also contracted 140 bps year over year to 22%, on account of an 8.5% increase in selling, general and administrative expenses to $242.3 million, a 7.7% rise in research and development expenses to $26.7 million, and a 4.2% increase in advertising and promotion-related expenses to $174.6 million.

Balance Sheet and Cash Flow

Mead Johnson exited the quarter with cash and cash equivalents of $1.586 billion from $1.050 billion at the end of fiscal 2013 and had long-term debt of $2.004 billion.As of June 30, 2014, the company generated operating cash flow of $304 million compared with the year-ago equivalent number of $399.8 million.

Guidance

Mead Johnson has upgraded its full year 2014 guidance. The company expects 9% sales growth for the year at constant exchange rate, higher than the previous guidance of 8%. The current Zacks Consensus Estimate for 2014 revenues is pegged at $4.429 billion.

The company has also raised the lower end of its 2014 adjusted EPS guidance. Mead Johnson now expects adjusted EPS in the range of $3.65 to $3.72, up from the earlier provided range of $3.60 to $3.72. The current Zacks Consensus Estimate for EPS is pegged at $3.69, which remains within the guidance range.

Our Take

Mead Johnson reported mixed second-quarter 2014 results with a top-line beat and a bottom-line miss. Although the company reported strong sales growth in the Asia segment, growth in the Latin America segment was almost neglible. In Latin America, higher prices in Venezuela and Argentina could not sufficiently drive sales growth, as they were offset by a significant devaluation in both these currencies.

However, in North America, Mead Johnson successfully achieved a considerable market share in the reported quarter, despite sales therein being negatively affected by increased input costs and high investments, mostly in the U.S.

Moreover, higher dairy input costs have been adversely affecting the company's gross margin as well as earnings growth, as per expectation. Nonetheless, Mead Johnson has raised its EPS guidance for 2014, which reflects management's confidence in its strong fundamentals, going forward.

Zacks Rank

Currently Mead Johnson holds a Zacks Rank #2 (Buy).

Some notable medical products stocks that warrant a look are Hospira Inc. HSP, OraSure Technologies, Inc. OSUR and Wright Medical Group Inc. WMGI. All these stocks carry a Zacks Rank #1 (Strong Buy).  

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