OK, so I'm not exactly talking about milk here, but I needed a catchy title...so deal with it :). Besides it gave me an excuse to use a picture of a supermodel in my post. What I am talking about is baby formula. I briefly touched upon the year's first IPO in a post last week and I am back with greater detail.
The company that has caught my eye is Mead Johnson Nutrition (MJN). It is a spin-off from another attractive company Bristol-Meyers Squibb (BMY). Mead Johnson's main product is the Enfamil brand of baby formula. As the father of two sons, I am very familiar with the product.
The company debuted on Friday and its stock immediately shot up from the $24 level to its current $27.45. One thing that I like about it already is that MJN plans to pay a $0.20 quarterly dividend, which with the stock trading at $27 and change represents a yield of around 3.0%.
It is currently trading at an estimated 13 times its 2008 earnings, which is in line with the rest of the rood sector. The question is, whether this company has a better than average product, superior management, or whether the baby sub-sector of food deserves a premium valuation.
From 2002 through 2007, admittedly a very different environment than we find ourselves in today, infant nutrition products experienced 11% annual growth, which is definitely faster than the food sector as a whole.
The baby formula industry is essentially an oligopoly, with three major players (I guess four if you count good old fashioned breasts). Mead Johnson with its aforementioned Enfamil, Abbott Labs (ABT) with its Similac line of products, and Nestle (NSRGY) with its Good Start line of products. Only Enfamil and Similac are produced by pharmaceutical companies which many, including a number of doctors, believe gives them an edge over Good Start. Not to mention the fact that ABT and Nestle are huge companies, so MJN is the only pure play out there on the infant formula sector.
I've always had a soft spot in my heart for spin-offs. I plan to keep a close eye on this one. I am clearing a spot out to add it to my CAPS portfolio today. As with all common stock, I plan on waiting until the markets fall further to even consider adding this one in real life though.