Infant Death, Product Recall, Liability TBD -- What if you own the stock?

While perusing headlines, I came across this from Bloomberg.com: Baby's Death Spurs Investigation into Formula Contamination.  "State and U.S. health officials are racing to find the source of contamination after one newborn died and another became ill from bacteria that may be linked to the use of baby formula."

Ouch!  Not something any parent wants to hear, nor any stockholder.  God bless the grief-stricken families, and may experts quickly determine the exact source of the bacteria.

One possible source of the bacteria is Enfamil Newborn formula, manufactured by Mead Johnson Nutrition Company (MJN).  While I want to stress that there could be any number of other possible sources of the bacteria, Mead Johnson's stock is plummeting, and there are shareholders who are wondering what to do.

In a Dec. 22 research note, Citi Investment Research and Analysis reports, "We have spoken to Mead Johnson management following our note earlier regarding Wal-Mart's recall of a batch of Enfamil Newborn powder formula due to the death of a 10 day old infant from Missouri who had contracted Cronobacter bacteria.  At this point, management believes that its Enfamil Newborn product is safe, as well as the overall Enfamil product line, as plant tests at the Zeeland Michigan facility (all of MJN's U.S. Enfamil powder is produced here), are constant and ongoing, with none of the results revealing contamination by this bacterium.  Thus, it seems less likely that the issue originated at the plant and it remains possible that this tragic incident has nothing to do with Enfamil.  With that said, Mead Johnson is rechecking the old product samples, as is the FDA."

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Enfamil Newborn formula is a well-known mother's milk substitute.  Non-breastfeeding infants consume formula relatively exclusively during their first few months of life.  They are introduced to solid foods during their first year, but otherwise doctors generally recommend no other beverage aside from mother's milk, infant formula and water during the first year.

My babies all drank Enfamil formula after they finished with the breast-feeding stage.  We're talking a very large number of families which could quickly be entering panic mode if the source of the bacteria isn't quickly discovered, and that could be devastating for Mead Johnson's stock.

Mead Johnson Nutrition Company is a pediatric nutrition company, marketing over 70 brands of nutrition products in 50 countries.  Annual revenues rose to $3.1 billion in FY 2010, and net income rose to $451 million.

Wall Street consensus earnings per share (EPS) are projected to rise 15%, 15% and 13% in fiscal years 2011 through 2013.  The price earnings ratio (PE) is 24.7, and the dividend of $1.04 per share yields 1.51%.  (If the stock fell to $63, the resulting dividend yield would be 1.65%.)

In October, Mead Johnson announced plans to build a $350 million facility in Singapore and management changes designed to support the company's long-term growth strategy.

Mead Johnson stock split off from Bristol-Myers Squibb in 2009.  The stock had been climbing steadily since the spin-off, and in fact had reached a new high of $76.53 on Dec. 21, the day before the news story broke.  The stock fell $7.72 per share to a closing price of $68.76 on Dec. 22, 2011.  There's a support level around $68/69, but another rash of panicked selling could easily bring the stock down to the next support level of $63/64.  If more bad news comes out -- sadly, I'm referring to more infant deaths -- the next support level is about $55.

What do you do if you own the stock?  That's going to depend on your emotions.  If the stress is eating you up, put in a stop-loss order or sell the stock outright.  But considering that you probably have an adjusted cost basis in the stock, subsequent to the Bristol-Myers Squibb stock spin-off in 2009, if you own this stock in a taxable account, make sure you understand how to report your capital gains at tax time.

If you're an experienced stock investor, hopefully you already had a stop-loss order in place.

If you're an opportunist, always looking to "buy low", pay close attention to news stories on Mead Johnson.  If it turns out that the source of the bacteria was not Enfamil Newborn formula, then be ready to buy shares, because barring news anomalies, Mead is an attractive company for stock investors.  It is reasonable to assume that, if Mead Johnson is quickly cleared of liability, the stock will rebound to its previous trading pattern.

Note that 89% of the stock is held by institutions, according to a Standard & Poor's report from Dec. 17.  Institutional shareholders are less likely to panic and sell, which drives the price down, and more likely to buy more while the price is low and recovering, driving the price back up.

As an aggressive growth investor, I woud consider buying low if subsequent news stories clear Mead Johnson from any liability in the infant's death.  I would then use stop-loss orders to protect my profit as the stock hopefully continues on a steady uptrend.