Mead Johnson Nutrition CO (MJN), Nestle SA Reg Shs. Ser. B Spons (ADR) (NSRGY): The Risk in This Emerging Market Play

Consequently, Mead Johnson found itself losing market share in China in 2012, as the likes of Danone SA (ADR) (OTCMKTS:DANOY) and Nestle SA Reg Shs. Ser. B Spons (ADR) (OTCMKTS:NSRGY) fought hard to counteract weak sales in European markets. Mead was therefore forced to reduce shipments to distributors in order to get inventories back to normal levels. The plan worked – Mead claims that its market share has now been stable for the last four months, but this also may be a sign of strong competition.

Another potential problem is political in nature. The premium prices in China did not go unnoticed by the regime, and an antitrust probe was subsequently launched into price fixing in China.   The result was that six infant-formula companies were fined, including Mead Johnson, which had to pay a $33 million penalty.

In addition, Mead Johnson Nutrition CO (NYSE:MJN) reduced its prices in China by 7% to 15% , and Danone and Nestle SA Reg Shs. Ser. B Spons (ADR) (OTCMKTS:NSRGY) made similar moves. Mead Johnson’s price cuts took place in mid July, and were forecast to reduce annual sales by $55 million to $65 million. On the one hand, these figures only represent around 1.4% of its forecast sales for 2013. On the other, they present a warning over potential political risks in the future.

In addition, whenever companies cut prices across an industry, there will be uncertainty over which businesses will end up winning/losing market share. Will Mead Johnson end up losing market share out of this?

Where Next for Mead Johnson?
The company faces some fundamental questions over long-term demand from developed markets, and near and long-term risk from emerging markets. For different reasons, margins could come under pressure in both segments in the future.

However, with a current P/E ratio of around 25 times, the market doesn’t seem to want to stop believing in its prospects. This is understandable because outside of China, the company has been performing well, and it is still forecasting constant-currency revenue growth of 8% for 2013.

However, analysts now predict EPS growth that only approaches double-digits for the next few years, and Mead Johnson’s valuation is looking stretched for the risks involved in both of its segments. This is one for the monitor list.

The article The Risk in This Emerging Market Play originally appeared on Fool.com and is written by Lee Samaha.

Lee Samaha has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.