McCormick & Co. Inc. (MKC) is set to report second-quarter 2014 results before the opening bell on Jun 26. Last quarter, this global leader in spices and flavors posted a positive surprise of 6.9%. Let’s see how things are shaping up prior to the announcement.
Factors to Consider
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 customers have faced lower restaurant traffic, while in Asia, demand was impacted by consumer concern about bird flu in China.
Industrial segment sales improved in the first quarter of 2014 as higher sales to food and beverage companies made up for a decline in quick service restaurants. However, we do not expect any improvement in quick service restaurant trends through the rest of the year.
On the contrary, McCormick’s consumer business segment has done well, driven by the acquisition of the Chinese broth maker Wuhan Asia-Pacific Condiments Co. Ltd. (“WAPC”) in May 2013. We continue to expect the WAPC acquisition to add to the revenues in the coming quarter.
However, the company expects the difficult consumer spending environment to persist globally for some more time. Weak spending from budget-constrained consumers might hurt the company’s sales. The company also remains exposed to unfavorable foreign currency translations as it has a considerable international presence. The company expects currency headwind to reduce sales by approximately 1 percentage point in 2014. In addition, low disposable income of consumers and a high single-digit increase in raw material and packaging costs remain headwinds.
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 of #1, 2 or 3 for this to happen. That is not the case here as you will see below.
Zacks ESP: The ESP for McCormick is 0.00% as both the Zacks Consensus Estimate and Most Accurate Estimate stand at 62 cents per share.
Zacks Rank: McCormick’s Zacks Rank #4 (Sell) when combined with a 0.00% ESP makes surprise prediction difficult. 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
Other stocks in the consumer staples sector that have both a positive earnings ESP and a favorable Zacks Rank are:
Hain Celestial Group Inc. (HAIN), with an Earnings ESP of +1.12% and a Zacks Rank #1 (Strong Buy)
Post Holdings Inc. (POST), with an Earnings ESP of +4.00% and a Zacks Rank #3 (Hold).
Keurig Green Mountain Inc. (GMCR), with an Earnings ESP of +1.14% and a Zacks Rank #3.