U.S. Markets closed

Will McCormick (MKC) Disappoint This Earnings Season?

Zacks Equity Research

McCormick & Company, Inc. (MKC) is set to report fiscal third quarter 2013 results before the opening bell on Sep 26. Last quarter, this global leader in flavors posted in-line results. Let’s see how things are shaping up prior to the announcement.

Factors to Consider This Quarter

McCormick’s industrial business segment has been under pressure over the last few quarters due to the slowdown in demand from quick service restaurants, primarily in the U.S and Asia. In the U.S., quick service restaurant demand was soft due to focus on menu items not flavored by McCormick, while in Asia demand was adversely impacted by bird flu concerns in China. Also, the unfavorable mix of businesses affected industrial segment operating income in the quarter.

On the contrary, McCormick’s consumer business segment is doing well, driven by the recent acquisition of the Chinese broth maker Wuhan Asia-Pacific Condiments Co. Ltd. (“WAPC”) in Jun 2013. The WAPC acquisition has enhanced McCormick’s product portfolio in central China.

McCormick raised its sales projection for fiscal 2013 to include the impact of the acquisition. However, it has lowered its operating income growth rate and thereby earnings projection for fiscal 2013 to reflect the continued sluggishness in the industrial segment in the upcoming quarters.

We believe that the sluggish performance from the industrial business will take a toll in the third quarter as well. In addition, low disposable income of consumers and a high single-digit increase in raw material and packaging costs are expected to hurt margins and thereby its profitability. This along with currency headwinds and slow economic recovery in the U.S. is expected to more than offset the positive impact from acquisition in the third quarter.

Earnings Whispers

Our proven model does not conclusively show that McCormick is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, #2 or #3 for this to happen. That is not the case here as shown below.

Positive Zacks ESP: The Most Accurate estimate stands at 79 cents while the Zacks Consensus Estimate is at 78 cents. That is a difference of +1.28%.

Zacks Rank #4 (Sell): We caution against stocks with Zacks Rank #4 and #5 (Sell rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider

Here are some other companies in the consumer staple sector that can be considered as our model shows they have the right combination of elements to post an earnings beat this quarter:

Treehouse Foods Inc. (THS), Earnings ESP of +1.30% and a Zacks Rank #2 (Buy)

Hormel Foods Corp (HRL), Earnings ESP of +1.85% and a Zacks Rank #3 (Hold)

Kellogg Co. (K), Earnings ESP of +1.11% and a Zacks Rank #3.

Read the Full Research Report on MKCRead the Full Research Report on HRLRead the Full Research Report on KRead the Full Research Report on THSZacks Investment Research