It has been about a month since the last earnings report for McCormick & Company, Incorporated MKC. Shares have added about 3.5% 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 drivers.
McCormick Tops Third Quarter Earnings on Acquisitions, Ups View
McCormick delivered better-than-expected results in the third quarter of fiscal 2016, wherein both earnings and revenues beat the Zacks Consensus Estimate. The company also raised its financial guidance for fiscal year 2016.
Adjusted earnings of $1.03 per share beat the Zacks Consensus Estimate of $0.95 by 8.4%. Moreover, the figure improved 21.1% year over year, owing to favorable tax rate and higher operating income. Further, the favorable impact of higher sales and cost savings were offset by an increase in brand marketing and material costs, and currency headwinds.
Revenues and Profits
The company delivered third-quarter revenues of $1.091 billion, which marginally beat the Zacks Consensus Estimate by 0.2%. Revenues grew about 3% from the prior-year quarter, driven by acquisitions (Stubbs and Gourmet Garden), which added 2% to the sales increase.
Product innovation, brand marketing support and expanded distribution, as well as pricing actions also led to sales growth, offsetting the negative impact of material costs and currency. Excluding currency headwinds, revenues grew 6%.
The company’s adjusted operating income grew 11.7% to $172 million in the third quarter. On a constant currency basis, it increased 15%, owing to higher sales and cost savings more than offsetting material cost inflation and brand marketing expenses.
Consumer Business: Segment revenues grew 7% on a constant currency basis, driven by acquisition gains, increased volume, better product mix as well as pricing actions. Sales increased on a constant currency basis in all the regions of Americas, EMEA and Asia/Pacific, specifically in China where the company delivered double-digit growth in constant currency basis.
On a constant currency basis, adjusted operating income rose 12%, driven by the favorable impact of sales growth and cost savings more than offsetting the increase in brand marketing expenses and unfavorable impact of higher material costs.
Industrial Business: Segment revenues increased 4% year over year on a constant currency basis in the third quarter, driven by higher sales, improved volumes, higher pricing in response to higher material costs and improved product mix. Sales increased on a constant currency basis in all the regions of Americas, EMEA and the Asia/Pacific.
On a constant currency basis, adjusted operating income increased 23% year over year, as the favorable impact of higher sales and cost savings more than offset the unfavorable impact of increases in material costs and brand marketing expense.
Raised Fiscal 2016 Guidance
The company raised its earnings and sales growth outlook for 2016 driven by strong year-to-date performance and current projections for the fourth quarter.
The company expects sales to grow approximately 3%, which is at the upper end of its previous guidance range. Excluding the estimated impact of unfavorable currency rates, the projected growth rate is approximately 6%. The company expects higher base business sales, new products, acquisitions and pricing to contribute to this growth rate.
The company expects fiscal 2016 adjusted operating income to grow approximately 7%, which is at the upper end of its range of 5% to 7% increase from adjusted operating income of $614 million in 2015. In constant currency, adjusted operating income is expected to grow approximately 10%.
McCormick continues to expect fiscal 2016 adjusted earnings to be in the range of $3.75 to $3.79 per share, up from the previous guidance of $3.68 to $3.75. The new guidance marks an increase of 8% to 9% compared with $3.48 in 2015. On a constant currency basis, adjusted earnings are expected to grow in the range of 12% to 13%.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed a downward trend in fresh estimates. There have been three revisions lower for the current quarter. In the past month, the consensus estimate has shifted lower by 8.8% due to these changes.
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 lot on the momentum front with a 'F'. However, the stock was allocated 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.
Our style scores indicate that the stock is solely suitable for growth investors.
Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift. The stock has a Zacks Rank #3 (Hold). We are expecting an inline return from the stock in the next few months.
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