Despite Skeptics, BMO Expects New China Baby Policy to Drive Mead Johnson (MJN) Results and Stock Higher

September 21, 2016 9:05 AM EDT
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Price: $74.84 --0%

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BMO Capital analyst Amit Sharma said while most investors do not expect the removal of one-child restrictions to have a meaningful impact on China's birth rates and on Mead Johnson Nutrition's (NYSE: MJN) operating performance, they disagree.

Sharma said the roll-out of the new "Two Child" policy could increase China's live births by 6%-11% over the next five years, leading to mid-single digits incremental volume growth and likely easing price-based promotions in Mead's largest infant/toddler formula market.

The firm expects the new policy to add 5-9 million additional babies in the next five years (compared to ten years average annual births of 16.6 million in China). They note that their estimate appears to be conservative relative to the Chinese government's estimate of 17 million additional births, as it assumes: 1) only 50-60 million women would benefit from the new policy vs. government’s estimate of 90 million; and 2) only 10%-15% of these women would eventually have a second child in the next five years vs. government’s expectation of 23%-33%.

While they expect the year of the "Monkey" (2016) to raise Chinese birth rates in 2016/17 (+3.6% average lift in the last four 12-year cycles), it would be largely incremental to the firm's estimate.

They expected 6%-11% annual increase in live births between 2017 and 2022.

The firm is raising MJN Asia segment 2017 sales and EBIT growth estimates by 110 and 200 basis points, respectively. They expect the policy change to be a bigger contributor to Mead's growth/earnings transition in 2018/19.

The firm reiterated an Outperform rating and $97 price target on MJN, suggesting upside of 29%.

For an analyst ratings summary and ratings history on Mead Johnson Nutrition click here. For more ratings news on Mead Johnson Nutrition click here.

Shares of Mead Johnson Nutrition closed at $76.76 yesterday.

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