According to a filing with the SEC, an LLC connected to Mead Johnson Nutrition CO (NYSE:MJN) Board member Howard Bernick purchased a little over 3,500 shares of the company’s stock on April 30th at an average price of $82.38 per share. Insiders should be reluctant to buy shares of their company, instead preferring to diversify- unless they are more confident in the stock’s prospects than the usual “this will be a good year for us.” In fact, studies do show a small outperformance effect for stocks bought by insiders (read our analysis of studies on insider trading) and so we think that insider purchases can work similarly to a stock screen as a source of investment ideas. Bernick also has a decent personal track record of buying Mead Johnson Nutrition CO (NYSE:MJN): our database has him making a purchase a little over four years ago at $24 per share.
Mead Johnson Nutrition CO (NYSE:MJN) sells infant formula and other children’s nutrition products, including products for children with special dietary needs. The company reported 5% revenue growth in the first quarter of 2013 versus a year earlier; due to higher costs- notably, a significant increase in advertising and promotion expenses- net income grew by 3%. Considering that the market is granting Mead Johnson a premium valuation on the strength of its business, these results are somewhat disappointing in our view. The market capitalization of over $16 billion places the food company at 27 times trailing earnings; even in an industry where valuations have been bid up following Berkshire Hathaway’s purchase of Heinz, that seems high to us.
Several hedge funds were aggressively buying Mead Johnson Nutrition CO (NYSE:MJN) during the fourth quarter of 2012, according to our database of 13F filings which we track as part of our work developing investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year). For example, billionaire and Tiger Cub Stephen Mandel’s Lone Pine Capital initiated a position of 3.7 million shares during the quarter (see Mandel’s stock picks). Other buyers of Mead Johnson included Citadel Investment Group and Bain Capital’s hedge fund Brookside Capital.
Other large cap food companies include General Mills, Inc. (NYSE:GIS), Kellogg Company (NYSE:K), Campbell Soup Company (NYSE:CPB), and The J.M. Smucker Company (NYSE:SJM). Kellogg and J.M. Smucker are also valued at over 20 times their trailing earnings, though they are still valued at at least something of a discount to Mead Johnson Nutrition CO (NYSE:MJN). The J.M. Smucker Company (NYSE:SJM)’s earnings were up strongly in its most recent quarter compared to the same period in the previous fiscal year, but revenue was only up 6%. We’re not sure the improvements on its bottom line are sustainable, so we would avoid the stock at its current pricing.
Wall Street analysts are optimistic on Kellogg Company (NYSE:K), but even given their forecasts for higher EPS the forward P/E comes out to 16. The company us similar to J.M. Smucker in that earnings did quite well last year compared to 2011, but revenue growth was more modest and so we’re somewhat skeptical Kellogg Company (NYSE:K) will hit analyst targets.
Campbell Soup Company (NYSE:CPB) and General Mills, Inc. (NYSE:GIS) are good defensive stocks, with beta statistics of 0.2 or lower (and General Mills also boasts a dividend yield of over 3% at current prices). However, earnings numbers here have not been as good: Campbell Soup Company (NYSE:CPB) actually reported a decline in net income in the fiscal quarter ending in January from a year ago, while General Mills, Inc. (NYSE:GIS) saw very little change in its last quarterly report. These stocks are also not particularly cheap, at 17 times forward earnings estimates, and while the stability of these companies makes them less sensitive to economic conditions we’d imagine that it also limits their upside opportunities from growth.
Even with the insider purchase, we wouldn’t recommend buying Mead Johnson Nutrition CO (NYSE:MJN) right now. Food stocks in general don’t seem to be good values, and that company is trading at a considerable premium to its peers; in addition, revenue and earnings numbers have not been as strong as we would like for a company valued at such high multiples.
Disclosure: I own no shares of any stocks mentioned in this article.
