We reaffirm our Neutral recommendation on McCormick & Co. (MKC) following an appraisal of its fourth quarter fiscal 2012.
Why the Reiteration?
McCormick reported its fourth quarter results on Jan 24, 2013. Its earnings grew 13.3% year-over-year, driven by top-line growth, improved operating income, higher income from unconsolidated operations and favorable tax rate. Positive volume, improved product mix and pricing actions in response to high input costs drove the top line. McCormick’s deals completed in the year 2011 (acquisition of Poland-based Kamis S.A. and Kitchen Basics, a leading brand of liquid stock; and a joint venture with India-based Kohinoor Foods Ltd.) contributed to overall revenue growth in the fourth quarter. However, both sales and earnings lagged the Zacks Consensus Estimate.
Following the release of fourth quarter results, the Zacks Consensus Estimate for fiscal 2013 has gone down 0.3% to $3.21 per share. The Zacks Consensus Estimate for fiscal 2014 has also declined 0.3% to $3.55 per share. With the Zacks Consensus Estimates for both fiscal 2013 and 2014 going down, McCormick now has a Zacks Rank #4 (Sell).
McCormick has been suffering from high material costs over the last few years. Higher prices for raw materials have adversely impacted the company’s gross margins in fiscal 2012. In addition, low disposable income of consumers and a high single-digit increase in raw material and packaging costs in fiscal 2012 have hurt the margins of the company and thereby its profitability. Though the company has taken pricing actions to combat rising material costs, the company still expects modest input cost inflation of approximately 3% in fiscal 2013.
Though McCormick focuses on saving cost, enhance productivity, expand its presence in the emerging markets and product innovation, we believe that currency headwinds, slow economic recovery in the U.S. and persistently sluggish European economic conditions also create an overhang.
Other Stocks to Consider
Other diversified food makers worth considering include Flower Foods Inc (FLO), Chiquita Brands International Inc (CQB) and Conagra Foods Inc (CAG), each of them carrying a Zacks Rank #1 (Strong Buy).
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