McCormick (MKC) Down 6.3% Since Last Earnings Report: Can It Rebound?
It has been about a month since the last earnings report for McCormick (MKC). Shares have lost about 6.3% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is McCormick due for a breakout? 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 Q3 Earnings Match Estimates, EPS View Up
McCormick reported third-quarter fiscal 2023 results, wherein earnings declined year over year, though sales gained from pricing actions.
Results reflect continued strength in the demand for the company’s compelling products, along with the efficient implementation of growth strategies. McCormick’s effective pricing strategy and improved underlying business volume trends keep it well-positioned for growth. Management raised its bottom-line guidance for fiscal 2023 while keeping the sales and adjusted operating income growth view unchanged.
Quarter in Detail
Adjusted earnings of 65 cents per share declined 5.8% from 69 cents in the year-ago quarter. The metric came in line with the Zacks Consensus Estimate. The year-over-year downside was a result of lapping gains related to the optimization of the company's debt portfolio in the year-ago period, partly compensated by higher income from unconsolidated operations stemming from the solid performance of McCormick de Mexico (the company’s biggest joint venture).
The company generated sales of $1,684.7 million, up 6% year over year, including negligible currency effects. Constant-currency (cc) sales growth was backed by the 8% gain from pricing actions, somewhat offset by a 2% decline in the volume and mix. However, the top line missed the Zacks Consensus Estimate of $1,692 million. The volume decline stemmed from the Kitchen Basics divestiture, softer-than-expected economic recovery in China, the exit of the Consumer business in Russia and a decline related to MKC’s decision to discontinue the low-margin business.
McCormick’s gross profit margin expanded 150 basis points due to efficient pricing, along with cost savings from the Comprehensive Continuous Improvement and GOE programs. This was partly countered by escalated cost inflation. SG&A expenses escalated year over year due to elevated employee incentive compensation expenses and increased distribution and brand marketing costs, partly offset by cost savings from the abovementioned programs. The adjusted operating income was $251 million, which jumped around 5% year over year. At cc, the adjusted operating income rose 5%, backed by increased sales and gross margin, partly countered by a rise in SG&A expenses.
Segment Details
Consumer: Sales went up 1% to $937.1 million, including a minimal currency impact. Sales growth was driven by a 5% rise in pricing, somewhat offset by a 4% drop in volumes. The volume decline resulted from the same factors that hurt the overall company volumes. Sales increased 1% in the Americas and 15% in the EMEA while tumbling 16% in the Asia/Pacific.
Flavor Solutions: Sales in the segment advanced 12% to $747.6 million. On a cc basis, sales grew 11% due to pricing gains of 10% and volume gains of 1%. Segment sales remained sturdy across all regions. Flavor Solutions’ sales in the Americas grew 11%. Flavor Solutions’ sales in the EMEA rose by 17%. Sales in the Asia/Pacific market ascended 7% year over year.
Financial Update
McCormick exited the quarter with cash and cash equivalents of $154.7 million, long-term debt of $3,385.3 million and total shareholders’ equity of $5,070.1 million. Through the third quarter of fiscal 2023, net cash provided by operating activities was $660 million.
Management expects to generate a robust cash flow in fiscal 2023, wherein it is likely to return a considerable part of its cash flow to shareholders via dividends.
Fiscal 2023 Guidance
McCormick anticipates fiscal 2023 to witness a solid underlying business performance, backed by sales growth. It expects the GOE Program and the lapping of pandemic-led hurdles to have a positive effect on the fiscal 2023 operating income, which is likely to be somewhat negated by the impacts of the Kitchen Basics divestiture and a rise in employee incentive compensation costs. Management anticipates currency movements to have a minimal impact on fiscal 2023 net sales, operating income and EPS. The bottom-line growth is likely to be partly hampered by increased interest expenses and an increased projected adjusted effective tax rate. However, the company raised its adjusted EPS view for fiscal 2023, thanks to a stellar year-to-date and forecasted show from its biggest joint venture, McCormick de Mexico. That said, management reiterated its net sales and operating income guidance.
For fiscal 2023, net sales are expected to increase 5-7% from the fiscal 2022 levels. Management expects sales growth to be fueled by pricing actions, which, along with cost savings, are likely to help it counter inflationary headwinds. The company anticipates seeing solid growth via brand strength, brand marketing, new products, category management and differentiated customer engagement. The adjusted operating income is still likely to grow 10-12% in fiscal 2023. Management now envisions fiscal adjusted EPS in the band of $2.62-$2.67 compared with the earlier view of $2.60-$2.65. The bottom-line view suggests growth from $2.53 recorded in fiscal 2022. On a GAAP basis, McCormick projects fiscal 2023 earnings in the range of $2.46-$2.51 per share compared with the year-ago period figure of $2.52.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision flatlined during the past month.
VGM Scores
At this time, McCormick has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Charting a somewhat similar path, 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 F. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
McCormick has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
Performance of an Industry Player
McCormick is part of the Zacks Food - Miscellaneous industry. Over the past month, United Natural Foods (UNFI), a stock from the same industry, has gained 10.2%. The company reported its results for the quarter ended July 2023 more than a month ago.
United Natural reported revenues of $7.42 billion in the last reported quarter, representing a year-over-year change of +2%. EPS of -$0.25 for the same period compares with $1.27 a year ago.
United Natural is expected to post a loss of $0.10 per share for the current quarter, representing a year-over-year change of -108.9%. Over the last 30 days, the Zacks Consensus Estimate has changed -59.5%.
The overall direction and magnitude of estimate revisions translate into a Zacks Rank #4 (Sell) for United Natural. Also, the stock has a VGM Score of A.
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