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McCormick (MKC) Benefits From Prudent Buyouts & Cost-Savings

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·3 min read
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  • MKC-V
  • HRL
  • HSY

McCormick & Company, Incorporated MKC is gaining from lucrative acquisitions and cost-saving efforts. Also, a shift in consumer demand to at-home consumption compared with the pre-pandemic levels favors the company. It is anticipating a gradual recovery in demand from restaurants and other foodservice customers.

In the last earnings call, management updated the fiscal 2021 sales view upward. The company now expects to achieve sales growth of 12-13% (or up 9-10% at constant currency) year over year. Earlier, management had expected to achieve a sales increase of 11-13% (or up 8-10% at cc).

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Zacks Investment Research

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Acquisitions Driving Growth

McCormick has strategically increased its presence through acquisitions, which have been strengthening its portfolio. In December 2020, McCormick bought a 100% stake in FONA International, LLC and some of its affiliates. FONA’s diverse portfolio helps McCormick bolster its value-add offerings and expand the flavor solutions segment into attractive categories. In November 2020, McCormick completed the acquisition of the parent company of Cholula Hot Sauce — a premium Mexico-based hot sauce brand. The buyout of Cholula accelerates McCormick’s growth potential across the condiment platform and widens the product portfolio in the hot sauce category.

Several other companies in the food space are benefiting from acquisitions like Post Holdings, Inc. POST, Hormel Foods Corporation HRL and The Hershey Company HSY. In fourth-quarter fiscal 2021, Post Holdings’ top line included $99.8 million in net sales from acquisitions made through fiscal 2021. The buyouts include Private label ready-to-eat cereal business, Egg Beaters liquid egg brand, Almark Foods business and related assets and Peter Pan nut butter brand.

Hormel Foods is strengthening its business on the back of strategic acquisitions. In June this year, the company acquired the Planters snacking portfolio from The Kraft Heinz Company. Prior to this, the company acquired Texas-based pit-smoked meats company Sadler's Smokehouse in March 2020. The buyout is in sync with Hormel Foods’ initiatives to strengthen its position in the foodservice space.

Hershey entered into a definitive agreement to acquire Dot’s Pretzels LLC. The addition of Dot’s Pretzels is in sync with the company’s initiative to boost the salty snacking portfolio. The company also announced its plans to acquire Pretzels Inc. from an affiliate of Peak Rock Capital. The acquisition will further expand Hershey’s snacking and production capabilities. Management envisions concluding the transactions by the end of 2021.

Cost-Savings Boosts Growth

McCormick focuses on saving costs and enhancing productivity through the Comprehensive Continuous Improvement (“CCI”) program. Started in 2009, the CCI program helped the company reduce costs and improve productivity. It has used CCI savings to increase investments, leading to higher sales and profits. McCormick achieved cost savings of $113 million in fiscal 2020, courtesy of the CCI program. Management, in its last earnings call, highlighted that it expects to achieve CCI-led cost savings of nearly $110 million in fiscal 2021.

Wrapping Up

McCormick is grappling with higher costs stemming from the coronavirus outbreak. The company is encountering broad-based inflation in raw and packaging materials as well as transportation costs. Apart from this, McCormick is bearing the brunt of supply chain bottlenecks stemming from restricted transportation capacity and labor shortages.

That being said, the aforementioned cost-saving efforts coupled with gains from strategic buyouts are likely to aid growth.

The Zacks Rank #3 (Hold) company’s stock has increased 0.6% in the past three months against the industry’s decline of 1.1%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


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