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Mead Johnson Nutrition Company (MJN - Snapshot Report) reported a solid third-quarter 2013 with adjusted earnings per share (EPS) of 91 cents, up 28.2% year over year and significantly surpassing the Zacks Consensus Estimate of 80 cents.

This improvement was primarily on the back of higher sales and gross margin, partially offset by a higher effective tax rate and higher demand-generation investments. However, including the impact of certain one-time items, reported net earnings came in at $161.6 million or 79 cents a share, up 15.2% and 14.4% year over year, respectively.

Revenues in the reported quarter were $1.047 billion, increasing 14% year over year (up 16% at constant exchange rates or CER). The figure was also ahead of the Zacks Consensus Estimate of $999 million.

While sales in Asia/Latin America, the company’s largest geographical segment (representing 70% of the company’s total sales in the third quarter), surged 19% year over year (up 21% at CER) to $768 million, North America/Europe (contributing for the rest) sales were up 2% (same at CER) to $278.8 million.

Margins

Gross margin during the reported quarter expanded 389 basis points (bps) to 65.1% with 20.8% increase in gross profit to $65.1 million. Adjusted operating margin contracted 488 bps year over year to 22.8%, on account of a 5.6% increase in selling, general and administrative expenses to $22.6 million, a 15.3% rise in research and development expenses to $24.8 million and an 18.0% increase in advertising and promotion-related expenses to $163.8 million.

Balance Sheet and Cash Flow

Mead Johnsonexited the quarter with cash and cash equivalents of $985.2 million, down from $1.042 billion at the end of fiscal 2012 and had long-term debt of $1.516 billion. Year-to-date, the company generated operating cash flow of $592 million compared with the year-ago figure of $440.1 million.

Guidance

Based on a strong third quarter, Mead Johnson raised its fiscal-2013 EPS guidance to the range of $3.30−$3.37 from the earlier guided $3.22−$3.30. The current Zacks Consensus Estimate for EPS of $3.27 falls below the guided range. In addition, constant dollar sales growth from the company’s core operations (excluding businesses exited in late 2012) is expected to be in the range of 9% to 10%.

Our Take

We note that Mead Johnson had witnessed a drop in share prices over the last three months along with heavy regulatory headwinds in the key Chinese market. However, the latest quarter showed signs of rebound with a top- and bottom-line beat.

Mead Johnson run into trouble in July this year with the antitrust review of resale prices commenced by the Bureau of Price Supervision and Anti-Monopoly of China’s National Development and Reform Commission (NDRC). The company and its competitors were accused of breaching anti-monopoly laws.

As a reaction to the probe, Mead Johnson, on Jul 16, declared a 7-15% price cut in the country for its leading products. Following the resolution of the antitrust review on Aug 6, the company slashed its guidance for reported EPS for the ongoing year.

Following the hitch, Mead Johnson is working hard to regain investors’ faith. Last September, the company declared that its board of directors has authorized a new share repurchase program of up to $500 million of the company’s outstanding common stock.

Currently, Mead Johnson carries a Zacks Rank #2 (Buy). Other medical stocks likeAlign Technologies Inc. (ALGN - Analyst Report), Boston Scientific Corp. (BSX - Analyst Report) and Bio-Rad Laboratories, Inc. (BIO - Snapshot Report) are also worth considering. While Align carries a Zacks Rank #1 (Strong Buy), both Boston Scientific and Bio-Rad sport a Zacks Rank #2 (Buy).

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