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McCormick Up Over 13% Post Q2 Earnings: Can it Grow Further?

Zacks Equity Research

It hasn’t even been two weeks since McCormick & Company, Incorporated MKC released second-quarter fiscal 2018 results, wherein its shares have gained 13.2%. In fact, the company has been in investors’ good books for quite some time now. Evidently, this Zacks Rank #3 (Hold) stock has rallied 18.6% in the past six months, against the industry’s decline of 3.7%.

Let’s take a sneak peek into McCormick’s second-quarter performance and see if McCormick’s growth driver can help it sustain its solid record amid cost hurdles.

Q2 Retains Robust Record

McCormick’s second-quarter fiscal 2018 marked its sixth and fifth consecutive quarter of earnings and sales beat, respectively. Moreover, the company has been witnessing year-over-year growth in top and bottom lines for more than a year now. Clearly, McCormick’s impressive record has been a treat for investors. McCormick has been gaining from its focus on buyouts, product innovations, cost-containment measures and efficient marketing initiatives. Some of these factors also drove the company’s second-quarter results.

While earnings were fueled by solid sales, cost savings from Comprehensive Continuous Improvement (CCI) program, focus on profit realization and portfolio shift to more value-added products, sales gained from robust results at both the segments, especially across Americas. Also, sales were boosted by buyouts, efficient pricing, and improved volumes and product mix. Markedly, the acquisition of Frank’s and French’s brands drove sales by 13%.

CCI Program Bodes Well, Savings View Up

McCormick focuses on saving costs and enhancing productivity through its ongoing CCI program. Started in 2009, McCormick’s CCI program has helped the company focus on reducing costs and enhancing productivity. It has used CCI savings to increase its investments, thereby leading to higher sales and profits. Cost savings through CCI and streamlining actions reached $117 million in fiscal 2017, up from $109 million in fiscal 2016, $98 million in 2015 and $69 million in 2014. Notably, cost savings from CCI aided in expanding the company’s gross and adjusted operating income margins during the second quarter of fiscal 2018. This also marked the company’s 10th consecutive quarter of adjusted operating margin expansion. The company projects adjusted operating income growth in the range of 23% to 25% in fiscal 2018, wherein it now plans to achieve cost savings of $105 million compared to the old projection of $100 million. Consequently, management now expects gross margin to expand 175-225 bps in fiscal 2018 compared to the previously expected range of 150-200 bps increase.

Buyouts Remain a Major Driver

McCormick has been strategically increasing its presence through acquisitions, in order to grow its spices and seasonings portfolio. McCormick’s acquisition of the food division of RB Foods, a British consumer products company, in August 2017, is the largest deal for the company till date. With iconic brands like Frank's RedHot Hot Sauce and French's Mustard, French's Crispy Vegetables and Cattlemen's BBQ Sauce, RB Foods is likely to continue being an asset for McCormick’s spices portfolio. Encouragingly, the acquisition of Frank’s and French’s brands drove McCormick’s sales by 13% in the second quarter, with gains from the buyout witnessed at both segments. Evidently, Frank’s and French’s brands boosted consumer and flavor solutions segments’ sales by 14% and 12%, respectively. Also, additional sales from these acquired brands are expected to boost the top line by 8% in fiscal 2018.

Will Cost Hurdles be Offset?

McCormick continues to incur increased brand marketing and freight expenses. These factors had a negative impact on margins in the second quarter. McCormick continues to undertake increased brand marketing to further drive sales. Also, freight costs are expected to remain a headwind for gross margin in fiscal 2018.

Nevertheless, we expect the company’s CCI program to provide cushion. Also, McCormick’s impressive sales drivers are likely to help it offset these woes and help the company keep its stellar show on. Markedly, management expects these tailwinds to drive sales growth by approximately 13-15% in fiscal 2018. Further, earnings for fiscal 2018 are expected in the range of $4.85-$4.95, reflecting a growth of 14-16% from the year-ago period’s tally.

Check Out These Solid Food Stocks

MEDIFAST INC MED, a Zacks Rank #1 (Strong Buy) stock, has delivered positive earnings surprises in the past three quarters.You can see the complete list of today’s Zacks #1 Rank stocks here.

The Chefs' Warehouse, Inc. CHEF, with long-term earnings per share growth rate of 22%, flaunts a Zacks Rank #2 (Buy).

B&G Foods BGS, with a Zacks Rank #2, delivered positive earnings surprise in the last reported quarter and has gained 31.5% in the past three months.

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