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Stock Strategist

Mead Johnson Nurtures Growth Prospects

Strong brands and attractive industry dynamics should keep the company's returns high.

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With a wide moat based on strong brands,  Mead Johnson Nutrition (MJN) is well positioned in an industry in which its quality and science-based product differentiation resonate far more than price-based appeals. As the premier pure-play pediatric nutrition company, Mead Johnson is linked to demographic trends, benefiting from emerging-market industrialization and female workforce mobilization while suffering from efforts to increase breastfeeding. Scale drives research, sales, and marketing investments, all of which reinforce Mead Johnson's intangible assets and create barriers to meaningful entry. The firm's products are aspirational in developing markets where trust in the safety of locally produced products is often low; therefore, we believe Mead Johnson will capture share as incomes rise.

Growth and profitability will be dictated by Mead Johnson's ability to capture share in emerging economies, which feature fragmented formula industries bifurcated between low-cost local producers and premium labels. Low-income consumers cannot afford high-end products, so the customer pools are distinct, with buyers trading up as their incomes rise. In the higher-end segment of the market that Mead Johnson targets, growing striation has resulted in a variety of product lines at different price points, playing into the firm's ability to differentiate based on quality using its research. The company's effort to introduce a superpremium formula into China is illustrative of Mead Johnson's ability to respond to market dynamics, as is its introduction there of Dutch-made formulas that respond to local concerns about the safety of Chinese-manufactured items.

Zain Akbari does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.