It has been about a month since the last earnings report for McCormick (MKC). Shares have added about 4.3% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is McCormick due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
McCormick Q2 Earnings Beat Estimates, Sales Miss
McCormick posted second-quarter fiscal 2019 results, wherein both earnings and sales improved year over year. Also, the bottom line came ahead of the Zacks Consensus Estimate. Results benefited from improved volumes and product mix in the company’s base business and new product offerings.
Quarter in Detail
Adjusted earnings of $1.16 per share improved 14% on a year-over-year basis, and surpassed the Zacks Consensus Estimate of $1.09. The bottom-line growth was backed by increased adjusted operating income and lower adjusted tax rate. However, foreign currency rates had an adverse impact on the bottom line.
This global leader of flavors and spices generated sales of $ 1,301.9 million that inched up nearly 0.1% year over year, including currency headwinds of roughly 3%. On a constant-currency (cc) basis, the top line improved 3%. Top-line growth was completely organic, and fueled by increased volumes and favorable product mix. Further, both Consumer Business and Flavor Solutions segments witnessed higher sales at cc. However, sales fell short of the Zacks Consensus Estimate of $1,311 million.
Gross profit rose 0.6% to $508.5 million, whereas the gross margin expanded 30 basis points (bps) to 39.1%.
Adjusted operating income increased about 5.1% to $215.2 million, while it rose 8% at cc. Further, adjusted operating margin expanded 80 bps to 16.5%. The upside can be accountable to savings from the company’s CCI program along with transaction and integration costs related to the acquisition of the Frank's and French's brands.
Consumer Business: Sales declined 0.6% to $764.1 million, though it grew 2% at cc on improvements in Asia Pacific and Americas regions. This, in turn, was driven by improved distribution and new products. Sales in the Americas rose 2% at cc. This was mainly driven by volume growth and improved product mix. Sales in the Asia-Pacific region grew 3% at cc, mainly owing to solid performance in India and Australia. In the EMEA region, sales rose 1% at cc, owing to volume enhancements and product mix.
Flavor Solutions: Sales in the segment rose 1% from the prior-year quarter’s figure to $537.8 million. At cc, sales increased 4% on improved performance in all regions, especially EMEA. This, in turn, was backed by product innovation, improved distribution and higher promotional activities. Sales in the Americas grew 3% at cc, driven by higher sales to quick-service restaurants, and increased sales of flavors and seasonings. Sales in the EMEA region improved 9% at cc, driven by broad-based growth, volume growth and favorable product mix. Sales in the Asia-Pacific region inched up 2% at cc, backed by improved sales to quick-service restaurants.
McCormick exited the quarter with cash and cash equivalents of $139.4 million, long-term debt of $3,977.5 million and shareholders’ equity of $3,382.6 million. For the second quarter of fiscal 2019, net cash provided by operating activities was $314.2 million.
Fiscal 2019 Guidance
The company expects continued rise in global demand for flavors and fresh food offerings. With solid growth strategies in place, the company expects to successfully meet consumers’ rising demand. To this end, McCormick is striving to utilize resources more efficiently and reduce costs to increase savings.
That said, management reiterated its sales projections for fiscal 2019, while it updated earnings and operating income view. The company continues to expect sales growth of 1-3% (up 3-5% at cc). It expects to achieve top-line growth completely on an organic basis, as it anticipates no benefits from acquisitions. That said, sales are likely to be driven by efforts like product launches, and expanded distribution and marketing. Also, strong pricing is expected to aid sales growth and counter elevated cost hurdles.
Incidentally, the company still anticipates to achieve cost savings of almost $110 million in fiscal 2019, which will be utilized for enhancing margins, sponsoring growth-oriented investments and offsetting high costs.
Moreover, McCormick now projects adjusted operating income to grow 6-8%, while it is likely to increase 8-10% at cc.
Finally, adjusted earnings for fiscal 2019 are projected to be $5.2-$5.3 per share, up from the previous guidance of $5.17-$5.27. The bottom line is expected to grow 7-9% at cc.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended downward during the past month.
At this time, McCormick has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of this revision has been net zero. Notably, McCormick has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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