UPDATE: UBS Starts Mead Johnson Nutrition (MJN) at Neutral
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(Updated - August 24, 2016 9:11 AM EDT)
UBS initiated coverage on Mead Johnson Nutrition (NYSE: MJN) with a Neutral rating and a price target of $90. Analyst Steven Strycula noted shifting China dynamics and he believes regulations create near-term risk.
"Mead is the last US pure play infant milk formula (IMF) manufacturer, making MJN a unique asset within an attractive growth category ($33B in sales) with structural advantages: rising per capita consumption, growing middle class/ female workforce, and attractive economics (>27% EBITDA margins). While Mead operates leading #1-2 share across 8 top mkts, we are Neutral near-term given MJN's exposure to China/HK (~35% of profits). China's $12B IMF market is now exiting an era of outsized growth (2010-15) when a series of food safety scandals involving local brands sparked a demand surge for imported formula. This demand shift to import brands has attracted gov't attention and new laws aimed at increasing safety & legitimizing trade channels," noted Strycula.
The analyst added, "New China FDA measures will close tax advantaged loopholes for the unregulated grey market channel and use registration requirements to reduce the number of brands sold in China by 75% (to 500 from 2000). Combined these regulations will free-up $1.5B of revenue by 2018 for multi-national brands like Mead to take. Every 10% share MJN captures of China's $1.5B grey market adds $150m in sales and $0.21 in EPS thru 2018. Mead's second sales catalyst is China's fast-growing $2B super premium import formula mkt. In April, MJN launched Enfinitas, its first super premium brand in China, and our checks point to encouraging sell-through. While we believe Enfinitas could add $100-200m in sales by 2018 (w/10% share net of cannibalization), we see longer tailed IMF price risk in China as reform could eventually shift demand back to local brands."
Shares of Mead Johnson Nutrition closed at $84.85 yesterday.
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