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McCormick (MKC) Q1 Earnings Beats, Revenues Miss Estimates

Zacks Equity Research

McCormick & Co. Inc. MKC posted first-quarter fiscal 2017 results, wherein the company reported earnings beat, but revenues lagged the Zacks Consensus Estimate.

Adjusted earnings of 76 cents per share beat the Zacks Consensus Estimate of 75 cents by 1.3%. It was 2.7% higher year over year owing to higher operating income. Further, the favorable impact of higher sales and cost savings were offset by an increase in brand marketing and material costs, higher tax rate and currency headwinds.

Revenues and Profits

The global leader in flavors and spices delivered first quarter revenues of $1.044 billion, which lagged the Zacks Consensus Estimate by 1.35%. Revenues grew about 1.3% from the prior-year quarter, driven by acquisitions (Gourmet Garden in Apr 2016 and Cajun Injector in Sep 2016), which improved the sales by 3%.

Product innovation, brand marketing support and expanded distribution as well as pricing actions contributed to the growth in sales, offsetting the negative impact of currency. Excluding currency headwinds, revenues grew 4%, driven by both the consumer and industrial segments.

The company’s adjusted operating income grew 5.3% to $138 million in the first quarter. On a constant currency basis, it increased 8% due to higher sales and cost savings which were offset by increase in brand marketing expenses and currency headwinds. A shift in the portfolio to more value added products also boosted sales.

McCormick & Company, Inc. Price, Consensus and EPS Surprise


McCormick & Company, Incorporated Price, Consensus and EPS Surprise | McCormick & Company, Incorporated Quote

Segment Details

Consumer Business: Segment revenues grew 1%, primarily driven by the incremental impact of the acquisitions of Gourmet Garden and Cajun Injector as well as strong sales performance in China. These sales increases were offset by weak U.S. food industry trends during the period and a challenging U.K. retail environment. Sales rose 2% on a constant currency basis. Sales increased on a constant currency basis in Americas and Asia/Pacific, while it declined in Europe, Middle East and Africa (EMEA). 

Adjusted operating income grew 5%, on a constant currency basis, driven by the favorable impact of sales growth, lower expenses and cost savings more than offsetting the impact of higher material costs and brand marketing expenses.

Industrial Business: Industrial segment sales grew 2% despite currency headwinds of 4%.  Industrial sales growth was not only driven by increased sales in  the Americas as well as Asia/Pacific regions but also by the incremental impact of the acquisition of Giotti in Dec 2016. On a constant currency basis, segment sales grew 6%, with increases in all the regions of Americas, EMEA and Asia/Pacific.

On a constant currency basis, adjusted operating income rose 18% year over year, driven by favorable impact of higher sales, product mix and lower expenses, including CCI-led cost savings, more than offset the unfavorable impact of increases in material costs and an increase in brand marketing.

Fiscal 2017 Guidance

The company has reaffirmed its adjusted earnings and sales growth outlook for 2017.

The company continues to expect sales to grow approximately 3–5% as compared with 2016.  Excluding the estimated impact of unfavorable currency rates, the projected growth rate is 5–7%. The company expects higher brand marketing, new products, expanded distribution and acquisitions to contribute to this growth rate.

The company has plans to achieve approximately $100 million of cost savings.

The company expects 2017 adjusted operating income to grow approximately 8–10%, from adjusted operating income of $657 million in 2016. On constant currency basis, adjusted operating income is expected to grow 9–11%.

McCormick expects 2017 adjusted earnings in the range of $4.05 to $4.13 per share, which marks an increase of 7–9% compared with $3.78 in 2016. The guidance also includes unfavorable currency headwinds of 2 percentage points. The Zacks Consensus Estimate for fiscal 2017 is $4.09 per share, which is within the guidance range.

Our Take

Overall, McCormick is focusing on building sales through acquisitions, and expects strong sales momentum to continue in fiscal 2017. Its cost saving initiative is also appealing. The company expects currency headwinds to continue in 2017. However, earnings growth is likely to get hurt by higher brand marketing expenses.

Share Price Movement

If we look into past six months’ performance, McCormick’s shares have outperformed the Zacks categorized Food-Miscellaneous/Diversified industry. The stock increased 3.67% in comparison to the industry’s decline of 2.20%. The broader Consumer Staples sector is placed at the second last of the Zacks Classified sectors (15 out of 16).

Zacks Rank & Key Picks

McCormick currently carries a Zacks Rank #3 (Hold).

Other better-ranked consumer staple companies include Pinnacle Foods, Inc. PF, Sysco Corp. SYY and ConAgra Foods, Inc. CAG.

While Sysco has an average positive earnings surprise of 9.29% in the trailing four quarters and a long-term earnings growth rate of 8.69%, Pinnacle Foods and ConAgra Foods have long-term earnings growth rate of 8.33% and 8.00%, respectively. All of them sport a Zacks Rank #2 (Buy). You can seethe complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

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