Mead Johnson Nutrition (MJN) trading volume exploded today after reports Wal-Mart (WMT) pulled Enfamil Newborn formula powder from over 3,000 stores. Wal-Mart pulled the formula after reports of a 10-day-old baby death from Cronobacter bacteria could possibly be linked to consuming Enfamil Newborn formula in Missouri. With only about 50 cases of Cronobacter Sakazakii bacteria reported in the last 40 years, the infection is rare.
Mead Johnson Company manufactures, distributes and sells infant formulas, children's nutritional products and other nutritional products in Asia, Europe, Latin America and North America. Its infant formula products include formulas for routine feeding, solutions formulas for mild intolerance and specialty formula products, including formulas for severe intolerance, formulas for premature and low birth weight infants, and medical nutrition products. Currently as I write this article shares are in a free fall. Shares are well below the 200 day moving average and down over $13 per share, for a drop of over 17% from yesterday's close at a price near $63.
Mead Johnson Nutrition Company markets its products under the Enfamil, Enfalac, Enfapro, Nutramigen, Pregestimil, Enfacare, Enfagrow, EnfaSchool, Enfakid, Sustagen KID, Lactum, Alacta, ChocoMilk, Cal-C-Tose, Expecta LIPIL and EnfaMama names.
WSJ.com is reporting Mead Johnson's company spokesman Christopher Perille said formulas are tested before sold and the batch in question tested negative. Mr. Perille is also quoted as saying the tests conducted before sale where checked again and confirmed the results came up negative.
Regardless of the outcome, there is going to be a lot of pain for investors of Mead Johnson. Mead Johnson may have to discontinue this line of products and possibly others to create a whole different line. This will take time and resources away from management to do damage control. If the formula is found to not be the cause, most of the damage can likely be mitigated. A lot will depend on how quickly the formula is removed as a possible source, if it's found not to be the source.
In a worst case scenario for shareholders, Enfamil is considered the source or likely source of the bacteria. Almost without a doubt the product line is done and contracts with Wal-Mart and other retailers could be in serious peril. With a current PE Ratio of about 24 it is easy to imagine a discount of 75% in share price as a result.
Wal-Mart Stores share price is lower today as well in contrast to the overall market, with the S&P 500 ETF (SPY) moving higher. Relatively, I would not expect much change in Wal-Mart share prices.
Options on Mead Johnson witnessed an explosion in volume today. Both January and February series had spikes in volume with put option volume unsurprisingly out pacing call option volume so far today.
Just as quickly as the shares fell to a low of under $61 a few paragraphs earlier, trades are printing for above $67 now. The story is unfolding each minute and Bloomberg is reporting a second child rumored to be sick didn't consume the formula, according to Mead Johnson. With the option volatility sky high, I am considering writing a bull put spread or a bear call spread. This will allow me to limit my risk and at the same time capture the very high premium.