Mead Johnson Nutrition Company (MJN - Analyst Report) reported a solid fourth-quarter 2013 with adjusted earnings per share (EPS) of 78 cents, up 8.3% year over year and a penny ahead of the Zacks Consensus Estimate. Apart from higher sales, lower effective tax rate contributed to EPS growth. However, including the impact of certain one-time items, reported net earnings came in at $153.2 million or 75 cents a share, up 14.2% and 13.6% year over year, respectively. For full year 2013, adjusted EPS came in at $3.38, up 9.4% year over year.
Revenues in the reported quarter were $1.060 billion, increasing 8% year over year (up 11% at constant exchange rates or CER). The figure was also ahead of the Zacks Consensus Estimate of $1.055 billion. Full year 2013 sales were $4.200 billion, up 8% from the year-ago period. While volume and price contributed to annual sales by 5% and 4% respectively, foreign exchange had a negative impact of 1% on the same.
In the quarter, Mead Jonson divided the Asia/Latin America segment into two reportable segments viz. Asia and Latin America. Accordingly at present, the company has three reportable segments, the third one being North America/Europe.
Sales in Asia (currently representing 51% of the company’s total sales) surged 19% year over year (up 20% at CER) in the fourth quarter to $544.2 million. Sales increased owing to contributions of 16% from volume and 4% from price. China distributors' inventory reductions in 2012 added 6% to the company’s growth during the quarter.
In Latin America, (comprising 20% of the company’s total revenue), sales were up 5% to $215.8 million. However, without considering the impact of unfavorable foreign exchange, sales were up 16% at CER.
However, in North America/Europe (contributing for the rest) sales were down 5% (same at CER) to $300.7 million. In this region, price improvement was more than offset by decline in volume driven by the exit of certain non-core businesses in late 2012 and lower category consumption in the U.S.
Gross margin during the reported quarter expanded 198 basis points (bps) to 63.0% with 11.6% increase in gross profit to $66.9 million. Adjusted operating margin expanded 78 bps year over year to 20.8%, on account of a 6.6% increase in selling, general and administrative expenses to $251.2 million, a 0.3% rise in research and development expenses to $27.9 million and a 21.3% increase in advertising and promotion-related expenses to $169.2 million.
Balance Sheet and Cash Flow
Mead Johnson exited the quarter with cash and cash equivalents of $1.051 billion from $1.042 billion at the end of fiscal 2012 and had long-term debt of $1.514 billion. For the full year, the company generated operating cash flow of $806.6 million compared with the year-ago figure of $692.7 million.
Mead Jonson initiated its full year 2014 guidance. Anticipating constant dollar sales growth of 7% for full year 2014, the company expects adjusted EPS in the range of $3.50 to $3.62. The current Zacks Consensus Estimate of $3.58 remains within the guidance range. Foreign exchange (remaining at the current level) will reduce sales growth by about 2.5 points.
Mead Jonson posted another quarter of strong growth with both top and bottom-line beat. Sales were strong in both Asia and Latin America with broad-based market share gains in the growing market.
However, in the past year, Mead Johnson ran into deep trouble 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. With the hitch now over, Mead Johnson is working hard to regain investors’ faith.
Currently, Mead Johnson carries a Zacks Rank #2 (Buy). Other well-placed medical stocks like Baxter International Inc. (BAX - Analyst Report), Covidien plc and Stryker Corporation (SYK - Analyst Report) are also worth considering. All the stocks hold a Zacks Rank #2 (Buy).