mjn initiating coverage final

INITIATING COVERAGE REPORT William C. Dunkelberg Owl Fund February 12, 2014 Bryan Murray: Lead Analyst [email protected] eff Schmidt: Associate Analyst [email protected] Bruce Boyer: Associate Analyst [email protected] COMPANY OVERVIEW Mead Johnson Nutrition Company manufactures, distributes, and sells infant formulas, children’s nutrition, and other nutritional products. Its infant formula products include formulas for routine feeding; solutions formulas for addressing mild fe eding problems, such as gas/fussiness, soy formula, lactose intolerance, anti-regurgitation , and cows’ milk protein allergy risk; and specialty formula products, including formulas for addressing severe intolerance, formulas for premature and low birth wei ght infants, and medical nutrition products. Its children ’s nutrition products comprise products at Stages 3, 4, and 5 for meeting children’ s nutritional needs at one to three years of age, three to five years of age, and beyond five years of age respectively. The company ’s children’s nutrition products also include nutritionally- balanced milk supplements for children targeting nutritional needs during specific stages of development; powdered milk supplements; and milk modifiers in powder form. It also produces a range of other products, including pre-natal and post- natal nutritional supplements for expectant and nursing mothers. The company markets its pr oducts primarily under the En famil line. It sells its products to mothers, health care professionals, and retailers in approximately 50 countries in North America, Europe, Asia, and Latin America. North Ameri ca comprises 25.4% of revenue, 30% from China and Hong Kong, 8% from Mexico and the remaining is spread across the world. INVESTMENT THESIS After Mead’s 20 13Q4 Earnings call, t he market became cautious on its 2014 fiscal year due to fear of its vulnerability to raising dairy costs as well as currency translation risk across its global operations. This caused its price to fall and multiples to retract, all while earnings an d revenue beat an alysts’ estimates for the fourth quarter and F2013. This left Mead undervalued to its historical P/E and EV/EBITDA multiples as well as how it has historically traded to its comps in the children’s nutrition s ector. Moving forward, Mead will return to historical multiples thanks to the easing of the “One Child Rule” in China, its continued R&D into its global market share leading products, its ability to capitalize on a competitor’s legal slip ups in the Asian markets, and its rebounding business in the US. All of these factors will continue to support this company which already boasts comp group best margins, profitability, and growth prospects. C o n s u m e r S t a p l e s : P a c k a g e d F o o d Mead Johnson Nutrition Company Exchange: NYSE Ticker: MJN Target Price: $92.66 Sector Outperform Recommendation: BUY Key Statistics (As of February 7, 2014): Price $75.95 52 Week Low $66.80 Projected Return 23.81% 52 Week High $86.87 Shares O/S (m) 202 Yield 1.80% Market Cap(b) $15,340 Earnings History: Earnings Date EPS Estimate ΔRevenue 4Q13 $0.78 $0.76 5% 3Q13 $0.91 $0.79 4% 2Q13 $0.84 $0.82 14% 1Q13 $0.85 $0.85 8% Earnings Projectio ns: Year Q1 Q2 Q3 Q4 Total 2011 $0.76 $0.72 $0.78 $0.52 $2.79 2012 $0.82 $0.83 $0.71 $0.72 $3.08 2013 $0.85 $0.84 $0.91 $0.78 $3.38 2014 $0.88 $0.85 $0.95 $0.82 $3.50 2015 $0.96 $0.94 $1.03 $0.95 $3.88 All prices curren t at end of pre vious trading se ssions from da te of report. Data is sourced from local exchanges via Capi tal IQ, Bloomberg and other vendors. The William C. Dunkelberg Owl fund does and seeks to do business with companies covered in its research reports. 1-Year Price Graph

mjn initiating coverage final

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