It has been about a month since the last earnings report for McCormick & Company, Incorporated MKC. Shares have added nearly 2% in that time frame, outperforming the market.
Will the recent positive trend continue leading up to the stock’s next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
McCormick First-Quarter Earnings Beat, Revenues Miss Estimates
McCormick posted first-quarter fiscal 2017 results, wherein the company reported earnings beat, but revenues lagged the Zacks Consensus Estimate.
Adjusted earnings of $0.76 per share beat the Zacks Consensus Estimate of $0.74 by 2.70%. It was 2.7% higher year over year owing to higher operating income. Further, the favorable impact of higher sales and cost savings were offset by an increase in brand marketing and material costs, higher tax rate and currency headwinds.
Revenues and Profits
The company delivered first quarter revenues of $1.044 billion, which lagged the Zacks Consensus Estimate by 1.32%. Revenues grew about 1.3% from the prior-year quarter, driven by acquisitions (Gourmet Garden in Apr 2016 and Cajun Injector in Sep 2016), which improved the sales by 3%.
Product innovation, brand marketing support and expanded distribution as well as pricing actions contributed to the growth in sales, offsetting the negative impact of currency. Excluding currency headwinds, revenues grew 4%, driven by both the consumer and industrial segments.
The company’s adjusted operating income grew 5.3% to $138 million in the first quarter. On a constant currency basis, it increased 8% due to higher sales and cost savings which were offset by increase in brand marketing expenses and currency headwinds. A shift in the portfolio to more value added products also boosted sales.
Consumer Business: Segment revenues grew 1%, primarily driven by the incremental impact of the acquisitions of Gourmet Garden and Cajun Injector as well as strong sales performance in China. These sales increases were offset by weak U.S. food industry trends during the period and a challenging U.K. retail environment. Sales rose 2% on a constant currency basis. Sales increased on a constant currency basis in Americas and Asia/Pacific, while it declined in Europe, Middle East and Africa (EMEA).
Adjusted operating income grew 5%, on a constant currency basis, driven by the favorable impact of sales growth, lower expenses and cost savings more than offsetting the impact of higher material costs and brand marketing expenses.
Industrial Business: Industrial segment sales grew 2% despite currency headwinds of 4%. Industrial sales growth was not only driven by increased sales in the Americas as well as Asia/Pacific regions but also by the incremental impact of the acquisition of Giotti in Dec 2016. On a constant currency basis, segment sales grew 6%, with increases in all the regions of Americas, EMEA and Asia/Pacific.
On a constant currency basis, adjusted operating income rose 18% year over year, driven by favorable impact of higher sales, product mix and lower expenses, including CCI-led cost savings, more than offset the unfavorable impact of increases in material costs and an increase in brand marketing.
Other Financial Data
McCormick ended the quarter with cash and cash equivalents of $125.7 million, long-term debt of $803.5 million, and total shareholders’ equity of $1,732 million.
During the quarter, the company generated cash flow from operations of $44.3 million and incurred capital expenditure of $29.6 million.
Coming to McCormick’s shareholder-friendly moves, it returned $142 million of cash to shareholders through dividends and share repurchases in the first quarter. At the end of the first quarter, $244 million remained on the current $600 million share repurchase authorization.
Second-Quarter Fiscal 2017 Guidance
McCormick expects its earnings to be down slightly from the year-ago period due to higher taxes and greater marketing costs. In addition, the impact of unfavorable currency exchange rates is particularly high in the second quarter of 2017.
Fiscal 2017 Guidance
The company has reaffirmed its adjusted earnings and sales growth outlook for 2017.
The company continues to expect sales to grow approximately 3–5% as compared with 2016. Excluding the estimated impact of unfavorable currency rates, the projected growth rate is 5–7%. The company expects higher brand marketing, new products, expanded distribution and acquisitions to contribute to this growth rate.
The company has plans to achieve approximately $100 million of cost savings. The company expects 2017 adjusted operating income to grow approximately 8–10%, from adjusted operating income of $657 million in 2016. On constant currency basis, adjusted operating income is expected to grow 9–11%.
McCormick expects 2017 adjusted earnings in the range of $4.05 to $4.13 per share, which marks an increase of 7–9% compared with $3.78 in 2016. The guidance also includes unfavorable currency headwinds of 2 percentage points.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed a downward trend in fresh estimates. There have been three downward revisions for the current quarter.
McCormick & Company, Incorporated Price and Consensus
McCormick & Company, Incorporated Price and Consensus | McCormick & Company, Incorporated Quote
At this time, McCormick's stock has an average Growth Score of 'C', though it is lagging a bit on the momentum front with a 'D'. Following the exact same course, the stock was allocated also a grade of 'D' on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of 'D'. If you aren't focused on one strategy, this score is the one you should be interested in.
The stock is suitable soley for growth based on our styles scores.
Estimates have been broadly trending downward for the stock. The magnitude of these revisions also indicates a downward shift. Notably, the stock has a Zacks Rank #3 (Hold). We are looking for an inline return from the stock in the next few months.
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