McCormick & Co. Inc.(MKC) is set to report fourth-quarter 2013 results before the opening bell on Jan 29. Last quarter, this global leader in spices and flavors posted in-line results. 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 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. We believe the WAPC acquisition will contribute meaningfully in the coming quarter.
However, the company continues to expect weakness in industrial products, while it expects improvement in the consumer business in the fourth quarter. In addition, low disposable income of consumers and a high single-digit increase in raw material and packaging costs remain the headwinds.
During the third quarter, McCormick lowered its operating income and earnings expectation for fiscal 2013 to reflect the sluggishness in the industrial segment. The company has lowered its adjusted operating income growth rate expectation to a range of 3% to 5%, compared with the previous expectation of a 5% to 7% increase. Also, the company now expects earnings at the lower end of the guided range of $3.13 to $3.19 per share due to the slowdown in demand from quick service restaurants, primarily in the U.S. and Asia.
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 Expected Surprise Prediction or ESP for McCormick is 0.00% as both the Zacks Consensus Estimate and Most Accurate Estimate stand at $1.19 per share.
Zacks Rank #4 (Sell): McCormick’s Zacks Rank #4 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:
W D Forty Co. (WDFC), with an Earnings ESP of + 1.49% and a Zacks Rank #2 (Buy).
ConAgra Foods, Inc. (CAG), with an Earnings ESP of +1.54% and a Zacks Rank #2.
Newell Rubbermaid Inc. (NWL), with an Earnings ESP of +2.17% and a Zacks Rank #3 (Hold).