Mead Johnson Nutrition(MJN)

Analysts: Mike Long, Diem Tran, Juan Castro

Penn State Investment AssociationConsumer Staples Sector

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Team Recommendation: Sell

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•Unjustifiable Valuation

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•Inability to Offset Rising Inflation

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•Declining U.S. Market

3 •12 Month Price Target:

$56.00

•Appropriate Exit Price:

~ $58.00

Top Three Reasons to Sell:

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Company Description

► Mead Johnson Nutrition Company is a leader in premium infant formula and child nutrition

► Operate under brands; Enfamil, Enfalac, Enfapro, Lactum, ChocoMilk, and many more

► Sell products through retailers such as; grocery stores, club stores, mass merchandisers, and convenience stores

► Operate in 50 countries with 70% of revenue derived outside of the United States

► Major competitors include: Abbot Labs, Nestle S.A., Danone and Pfizer

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Revenue Breakdown

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Geographic BreakdownSegment Breakdown

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Unjustifiable Valuation

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► Mead Johnson lacks a true competitor so it makes it virtually impossible to compare them to any other company on a comps. basis difficult to know whether or not they are appropriately valued

► Potential acquisition already priced into the stock (estimated 30%-40% of stock price)

► With the spin-off of Pfizer’s Wyeth Nutrition, MJN is no longer the only candidate in this industry to be taken over

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Inability to Offset Rising Inflation► Rising interest rates across Emerging Markets

Mead Johnson’s fastest growing segment by far► The People’s Republic of China have raised their one-

year deposit rate 4 times in 6 months to 3.25% in attempt to fight rising inflation (CPI 5.3%)

► India has raised interest rates 8 times totaling 200 bps over the last year impact markets more significantly this year due to fiscal policy lag

► Brazil raised their inflation forecast to 5.6% from 5.0% and cut their growth outlook to 4% from 4.5% for 2011

► With prices rising and disposable income falling in EM, customers will trade down to private label brands

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PROC

► Blimling and Associates, a dairy consulting firm, expects milk prices to rise 20% 7 month lag implies rising cost pressures at least through 2011

► MJN anticipating 7% increase in COGS not convinced they will be able to sustain these high margins from productivity savings alone especially if revenues don’t meet expectations

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Declining U.S. Market

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► WIC : a government subsidized program that provides coupons redeemable for formula for “at-risk” mothers and infants (50% of infants have benefited from the WIC program since it was created in 1975)

► Losing 4 contracts over the next 8 months equivalent to 7% of revenue from WIC (0.7% of total revenue)

► Increased competition for these contracts may cause Mead Johnson to bid even less in order to win, resulting in even greater losses WIC program generated $3 million in losses in 2010 for MJN

► Competition for these contracts is increasing because of belief in spillover effect► Contracts are managed at state level and with the budget constraints states are currently

facing we are not confident they will continue to fund this program to the extent they have previously

► Tough Economy for baby makin’…► U.S. birthrate down 4% in 1H10► Mgmt. does not believe the declining

birth rates have bottomed and don’t expect a turnaround until 2H12 function of high unemployment and falling disposable income due to rising costs

► MJN sees extended breastfeeding and earlier transitions to cow milk also saw a push for breastfeeding from Mrs. Obama

► Gained market share in 2010 due to Similac recall

► Expected to be pressure in 2H11 as mothers return to Similac

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Sector Strategy

► One-for-one swap KO for MJN roughly 21% of our portfolio, or ~$90,000

► Coke Drivers:► 1.) Coke vs. Pepsi We like Coke better than Pepsi because they are less exposed to

commodity cost increases since they do not have a snacks segment► 2.) Emerging Markets While we are concerned about rising inflation in emerging

markets, we believe we need to have exposure to these markets since that is where the growth is coming from going forward. Coke will be a less risky play than MJN on this front

► 3.) Product Innovation Continually able to come out with new products that drive growth. Diet Coke just surpassed Pepsi as the No. 2 soda in the U.S. yesterday!

► 4.) DCF PT $77 currently trading at $67 giving us about 15% upside

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Comparable Analysis

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Comparable Analysis

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Ratio Analysis

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Five Year Summary

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Projections

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Trends & CAGRs

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(5.0%)

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Growth Analysis

Series1

Series2

Series3

Series4

Series5

Time as of 2006

Gro

wth

or

% o

f S

ale

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Discounted Cash Flow

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Sector Risk & Correlation

► We are currently overweight food products by holding both Mead Johnson and McCormick, and we have no exposure to Beverages. By adding Coke we will have exposure to all of our sub-sectors with the exception of drug retail (CVS and WAG)

► More significantly, we would own a much larger portion of our benchmark from a weightings perspective PG (1 @ 14%), PM (2 @ 10%), KO (4 @ 7.50%)

► Costco is 11th biggest (3%) in our benchmark and McCormick is 31st

► Geographic exposure would remain the same (roughly 70% outside U.S. for both companies)

► Commodity costs impact MJN more since KO has the ability to take advantage of economies of scale much better

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Chart & News

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3/14/11– Pfizer announced the spin-off of Wyeth Nutrition

1/27/11– MJN reported Q4

earnings beating on bottom line but

missing on top line

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Debt Distribution

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Team Recommendation: Sell

•Unjustifiable Valuation

1

•Inability to Offset Rising Costs

2

•Declining U.S. Market

3 •12 Month Price Target:

$56.00

•Appropriate Exit Price:

~ $58.00

Top Three Reasons to Sell:

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Questions or Comments?