Why Hedge Funds Like Mead Johnson Nutrition (MJN) ~ market folly

Monday, March 8, 2010

Why Hedge Funds Like Mead Johnson Nutrition (MJN)

In our hedge fund portfolio tracking series we noticed that quite a few long/short equity funds added shares of Mead Johnson Nutrition (MJN) in the fourth quarter of 2009. In a recent letter to investors, Dan Loeb explained the rationale behind his hedge fund Third Point's position in MJN and we thought this would be a perfect time to examine just why so many hedgies are fond of this company.

Mead Johnson Nutrition (MJN) completely separated from Bristol-Myers Squibb (BMY) in December of 2009. MJN is a leading infant formula producer and carries the well known brand Enfamil, making it a definitive consumer staples play. The company has a truly global footprint as it garners large market share in North America and the rising world with over 58% of their sales coming from emerging markets. Loeb certainly likes their attractive earnings growth noting that, "once birth rates normalize in the developed world, the company will generate one of the fastest long-term sales and profit growth rates in the large cap consumer staples universe."

What's interesting is that Loeb's hedge fund has labeled this a risk arbitrage investment and sees MJN as a prime takeover target. In his investor letter, he identifies Nestle or Danone as companies that are big enough to acquire MJN. He explains that, "both companies are focused on health and wellness, have acquired infant nutrition assets in the past (Nestle paid 15.7x EBITDA for Gerber and Danone paid 21.7x EBITDA for Numico)." However, Loeb notes that investors might have to wait a while before MJN is potentially acquired as there are always various regulatory, tax and legal complications in the mix. And, he is more than happy to wait given MJN's emerging markets growth. For more of our coverage of Dan Loeb, we recently looked at Third Point's equity portfolio as well as their performance and exposure levels.

Now that we know the basics of the hedge fund thesis for Mead Johnson Nutrition, let's take a little bit closer look at some of the fundamentals. MJN has a market cap of over $10 billion, trades at an EV/EBITDA of 14.7, a trailing P/E of 25 and a forward P/E of 18.7. It has a PEG ratio of 2.26 and a price/sales of 3.5. These figures illustrate how you're paying up for the substantial emerging markets growth this company provides. This is seemingly the definition of a G.A.R.P. (growth at a reasonable price) investment.

Mead Johnson has profit margins of around 14%, revenue of over $2.8 billion, EBITDA of over $760 million, and quarterly earnings growth (year over year) of almost 38%. Insider ownership comes in at just over 6% and shares are trading near their 52-week high of $50.35. And those of you wanting a technical look at the stock can get an instant chart analysis of MJN here.

Overall, it's an interesting thesis from Loeb's Third Point and we'd imagine many other firms agree that MJN is a solid company by itself (high quality business), but is also fair game as a prime acquisition target. Some of the largest institutional owners of MJN shares include Blackrock, Owl Creek Asset Management, hedge fund Paulson & Co, Lee Ainslie's Maverick Capital, Stephen Mandel's Lone Pine Capital, and Dan Loeb's Third Point, among many others. It will be interesting to see if hedgies have continued to add shares of MJN in the current quarter as shares have been marching higher as of late.

Lastly, we make note that MJN has been popping on all sorts of hedge fund related data sets, including Goldman Sachs' VIP list, the list of top hedge fund holdings, and throughout our hedge fund portfolio tracking series. It was by far one of the most added stocks in the fourth quarter by hedge funds. Obviously, hedgies are bullish on MJN and now we have a better look as to why.

Taken from Google Finance, Mead Johnson Nutrition is "a pediatric nutrition company. Its Enfa family of brands, including Enfamil infant formula, is a global brand franchise in pediatric nutrition. The Company’s product portfolio addresses a range of nutritional needs for infants, children and expectant and nursing mothers. The Company markets its portfolio of more than 70 products to mothers, health care professionals and retailers in more than 50 countries in Asia, North America, Latin America and Europe."

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