McCormick & Company, Inc. MKC disappointed investors by reporting weak first-quarter fiscal 2017 results on Mar 28. The company also provided a disappointing guidance for the second quarter.
The global leader in flavors and spices posted earnings beat, revenues however, lagged the Zacks Consensus Estimate. The company achieved 1.3% higher sales and earnings growth of 2.7% year-over-year on the back of acquisitions and cost savings. The acquisitions of Gourmet Garden (in Apr 2016) and Cajun Injector (in Sep 2016) improved sales by 3%. Product innovation, brand marketing support and expanded distribution as well as pricing actions also contributed to the growth in sales.
However, the negative impact of material costs and currency overshadowed the positives. Unfavorable currency reduced sales growth by 2 percentage points and had a downward impact on the bottom line. Excluding currency headwinds, revenues grew 4% year over year. Unseasonable weather conditions, a later Easter holiday this year and weak trends in the U.S. grocery industry have significantly hurt the company’s sales in its Americas region in the first quarter fiscal 2017.
The company’s industrial segment has also been reporting sluggish sales over the past few quarters, particularly in the Americas, due to weak demand from quick service restaurants and lower restaurant traffic. Sluggish trend in the restaurant industry, which represents approximately 60% of the food service market, is also hurting segment’s sales. Restaurant traffic continues to witness year-over-year declines and restaurant spend has decelerated as well. Analysts expect industry softness and challenging year-over-year comparisons to continue in the second half of fiscal 2017.
To combat rising costs pressure, the spice giant is relying on its Comprehensive Continuous Improvement initiative, which is expected to produce $100 million in cost savings in 2017. The company also remains hopeful to accelerate its margins in the remainder of fiscal 2017. However, the Zacks Rank #4 (Sell) company holding a VGM score of ‘D’ expects the cost pressure to continue in the quarters ahead. As a result, the company has provided weak guidance for the second quarter.
Looking into the share price movement, we observed that the stock has underperformed the Zacks categorized Food-Miscellaneous/Diversified industry since past one year. While the stock declined 3.2%, the industry inched up 0.2% in the said time frame. On the other hand, the broader Consumer Staple sector, of which they are part of, grew 2.3% in the same time frame.
McCormick’s results have unnerved investors who are already perplexed by President Donald Trump’s new policies. Also, the Consumer Staples sector has been weak for quite some time now, making investors skeptical. Headwinds like unfavorable currency, food deflation, declining volumes, potential price wars, a competitive environment, slowdown in international markets and other global issues have been plaguing the companies in the sector.
Nevertheless, the economic data have been impressive with rising consumer and home builder confidence and surging manufacturing numbers.U.S. consumer confidence leaped in March to the highest level since Dec 2000 amid growing labor market optimism. Prospects of lower taxes and uptick in infrastructure outlays since the election of Trump propelled consumer sentiment to fresh highs.
Stocks of consumer staple companies are poised to grow, as evident from the renewed consumer spending strength. Fetching higher returns amid such an investment climate is a herculean task.
How to Pick the Best Stocks?
Since the aforementioned sector is positioned to benefit from this stellar reading on confidence level, picking stocks from such a sector will be a smart move.
Obviously, there are quite a few companies in the consumer staples space, so it may be difficult to pick the right stock for your portfolio. One way to narrow down the list of choices is by looking at stocks with a favorable Zacks Rank of #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP.
Earnings ESP is our proprietary methodology to determine which stocks have the best chance to surprise in their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. Our research shows that for stocks with this combination, the chance of positive earnings surprise is as high as 70%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
However, we have identified four stocks, which not only have strong fundamentals but are also equipped with the right combination of elements to post an earnings beat. Such stocks also boast of a VGM score of ‘A.’ Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.
Stocks to Pick
You may bet on Tupperware Brands Corporation TUP, which operates as a direct-to-consumer marketer of various products across a range of brands and categories worldwide. The stock carries a Zacks Rank #3 and has an Earnings ESP of +3.23%.
The current Zacks Consensus Estimate for the first quarter of 2017 stands at 93 cents a share. The Orlando, FL-based company delivered an average positive earnings surprise of 6.2% over the trailing four quarters, has a long-term earnings growth rate of 12.0% and a VGM score of ‘A.’ The company is slated to report results on Apr 25.
Tupperware Brands Corporation Price, Consensus and EPS Surprise
Tupperware Brands Corporation Price, Consensus and EPS Surprise | Tupperware Brands Corporation Quote
Investors can count on Inter Parfums, Inc. IPAR, which manufactures, markets, and distributes fragrances and fragrance related products. The stock carries a Zacks Rank #3 and has an Earnings ESP of +3.23%. The Zacks Consensus Estimate for the first quarter of 2017 is 31 cents a share.
Inter Parfums, Inc. Price, Consensus and EPS Surprise
Inter Parfums, Inc. Price, Consensus and EPS Surprise | Inter Parfums, Inc. Quote
This NY-based company registered an average positive earnings surprise of 7.44% over the trailing four quarters, and has a VGM score of ‘A.’ The company is expected to report results on May 9.
We also suggest investing in the meat processing company Sanderson Farms, Inc. SAFM. Based in Laurel, MS, Sanderson Farms carries a Zacks Rank #3 and has an Earnings ESP of +37.67%. It also has a VGM score of ‘A.’ The Zacks Consensus Estimate for the second quarter of fiscal 2017 is $2.15 per share. The stock has a long-term earnings growth rate of 9.00%. The company is expected to report results on May 25.
Sanderson Farms, Inc. Price, Consensus and EPS Surprise
Sanderson Farms, Inc. Price, Consensus and EPS Surprise | Sanderson Farms, Inc. Quote
NJ-based Newell Brands Inc. NWL can also be an attractive stock for investors. This consumer and commercial products maker has a Zacks Rank #3 and an Earnings ESP of +13.79. It also has a VGM score of ‘A.’ The Zacks Consensus Estimate for the first quarter of 2017 is 29 cents a share.
The company registered an average positive earnings surprise of 6.20% over the trailing four quarters, and has a long-term earnings growth rate of 11.96%. The company is expected to report results on May 5.
Newell Brands Inc. Price, Consensus and EPS Surprise
Newell Brands Inc. Price, Consensus and EPS Surprise | Newell Brands Inc. Quote
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