Mead Johnson Downgraded At BofA: Here's Why

• Mead Johnson Nutrition CO MJN shares are down 30 percent year-to-date, slipping and staying below the $80 mark since end-August.
• BofA Merrill Lynch’s Bryan D. Spillane downgraded the rating on the company from Neutral to Underperform, while reducing the price objective from $80 to $78.
• Owing to near-term concerns related to China, Spillane expects Mead Johnson’s shares to underperform on a relative basis.

Analyst Bryan Spillane believes that investor sentiment and Mead Johnson’s valuation are unlikely to improve “until the market re-gains confidence in sales growth and the sustainability of margins in China.” Industry-specific dynamics as well as macro trends weigh on the near-term outlook in China.

While saying that there is no “significant absolute downside” for Mead Johnson’s shares, Spillane added that expects the stock could underperform on a relative basis versus its multinational peers, until “corrective actions take hold.”

Mead Johnson’s management plans to initiate productivity programs and reinitiate share buybacks. “This suggests management sees the need to develop a more diverse set of value drivers to respond to changing market conditions,” Spillane wrote.

Despite management actions, there are near-term concerns over market share contraction and deteriorating margins in China and low visibility into when there would be a change in the competitive behavior in the industry.

The EPS estimate for FY16 has been reduced from $3.98 to $3.90 to reflect “a more adverse impact from currencies (BofAML house view is for a 10% devaluation of the China Renminbi) and modest underlying revision risk in the near-term based on our more sanguine view of the promotional intensity in China.”