Shares of baby formula maker Mead Johnson Nutrition (NYS: MJN) were thrashed after the company's Enfamil formula was suspected to have caused the death of a 10-day-old infant. Losing consumer and investor confidence, the company hit a rough patch. Shares plummeted by 10% on the first day after this news came in, followed by a further 5% decline the next day.
Mead Johnson has had a pretty good year in general. Sales in the third quarter have grown by 15% over the corresponding period last year. The company has been operating with relatively high margins, and with around 60% of its business exposed to emerging markets, Mead Johnson looks reasonably well positioned for growth going forward. However, the recent baby formula controversy has raised some concerns about the company.
Mead Johnson's Enfamil Premium Newborn infant formula reportedly caused the death of an infant in Missouri. Another Missouri baby tested positive for the same bacteria shortly thereafter, but fortunately, the outcome did not prove to be fatal.
Following the bad news, big retailers like Wal-Mart, Walgreen, Kroger, and Safeway pulled back Mead Johnson's baby formula from shelves. It is likely that this pullback will drastically choke the company's sales as about 12% of Mead Johnson's sales come from Wal-Mart.
After these events, samples of the same batch of Enfamil used by the child's family were tested by the Food and Drug Association for bacteria and harmful items. The tests yielded negative results. This is very positive news for the company, which will hopefully win back the confidence of consumers and investors alike.
The Foolish bottom line
The clean bill of health is a real shot in the arm for Mead Johnson. For a company that sold $1.6 billion worth of infant formula in the first nine months of 2011, which accounted for 40% of its total revenue for the period, the good review by the FDA must come as a huge relief. This should help reassure consumers and make it more likely that retailers will once again offer Mead Johnson's products. Add Mead Johnson to your Watchlist for more analysis on the stock -- just click here. My Watchlist is a 100% free service offered by The Motley Fool to keep you current on all the relevant news and events as they relate to your favorite companies.
At the time thisarticle was published Fool contributor Navjot Kaur does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of Wal-Mart Stores. Motley Fool newsletter services have recommended buying shares of and creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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