Formula Maker's Stock Drops on Alleged Infant Death
The Associated Press reports a second baby is sick with Cronabacter after reportedly claiming the life of a Lebanon, Missouri newborn. That first newborn, 10-day-old Avery Cornett was preliminarily diagnosed with the rare bacteria after reportedly being fed with the Enfamil baby formula by Meade Johnson (NYSE: MJN). Cronabacteris said to be an extremely rare bacteria that causes fatal infections on bloodstream and central nervous systems, especially on infants with a weak immune system. Only 50 or so cases have been identified in the last 40 years, according to Wall Street Journal.
When such unfortunate tragedies are linked to companies and their products, fortunes are preserved or obliterated by action and public relations. Both Enfamil maker Meade Johnson (NYSE: MJN) and seller Wal-Mart (NYSE: WMT) were quick to act in order to isolate the problem.
Benzinga contacted Meade Johnson's spokesperson Chris Perille on the matter soon after the news broke and Benzinga Pro reported it in real time (Give Benzinga Pro a try here). Through written remarks, Mr Perille told us that the company's intensive pre-packaging testing “includes tests for Cronobacter, consistent with the methodology used by both the FDA and the CDC. If an ingredient or a batch of powdered infant formula product were found to contain Cronobacter, it would be rejected and not distributed.”
Wal-Mart went further as it pulled all similarly packaged units of the allegedly tainted Enfamil product out of more than 3,000 stores over 49 states just a day after it pulled the product from its Lebanon, MO store where the fateful bottle fed to the dead infant had been purchased. Wal-Mart spokeswoman Dianna Gee told Business Week that the company was waiting on an active investigation on the product by the Missouri Department of Health, and that the “products could be returned at a later date” should no direct correlation be evidenced.
That investigation by the Department of Health carries obvious implications for those new parents who may be holding any related products, but the stakes are arguably high for the manufacturer as well. Infant formula made up approximately 62 percent of the company's net sales in 2010. The weight of a human death so far—the second case of Cronabacter appears to be unrelated to Enfamil—could carry material consequences for the company, if in fact a fault is identified somewhere in its production and packaging process.
Shares are currently reaching a low of session at about 17 percent lower in comparison to yesterday's close, so investors are reacting to a worse case scenario on that finding.
Traders who believe that we have seen the bottom on MJN shares today might want to consider the following trades:
- Long MJN: If we believe the company, its process chain is beyond reproach, which may mean the company can reasonably establish this case is limited. Walmart may also return Enfamil in its shelves, which would speak loud and clear on MJN's behalf. As such, any pullback today and tomorrow creates nice entry opportunities on a stock whose valuation was reaching fair value.
Traders who believe that today's slide is just the beginning may consider alternative action:
- Short MJN: The company is heavily leveraged (two thirds of net sales) on baby formula, and a human death is no easy stain on the record of a product that is fed to people's pride and joy
- Long Pfizer (NYSE: PFE): with a much larger market capitalization, Pfizer has a much lower leverage on competing baby formula products, but stands to benefit as customers migrate to an ombrella with a big name and good perception of reliability
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