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Will McCormick's (MKC) Cost Savings Offset Currency Woes?

Zacks Equity Research

Despiteseveral headwinds,McCormick & Company, Inc. MKC has been gaining momentum and is looking to reap long-term gains on the back of acquisitions and cost saving measures. We believe these concerns are short term and transitory in nature and therefore leave space for this Zacks Rank #3 (Hold) company to rebound in the long run.

McCormick’s price history reveals that in the past three months the stock rallied 7.7%, outperforming the Zacks categorized Food-Miscellaneous/Diversified industry, which showcased growth of just 2.9%.

Let us delve deeper into the details.

Estimates have largely been stable since McCormick posted fourth-quarter 2016 results on Jan 25. While the company reported in-line earnings, revenues lagged the Zacks Consensus Estimate.

Adjusted earnings of $1.27 per share were 8% higher year over year, owing to higher operating income and lower share count. Further, the favorable impact of higher sales and cost savings were offset by an increase in brand marketing and material costs, and currency headwinds. The global leader in flavors and spices delivered fourth-quarter revenues of $1.227 billion, which grew about 2% from the prior-year quarter, driven by acquisitions (Gourmet Garden in Apr 2016 and Cajun Injector in Sep 2016). Product innovation, brand marketing support and expanded distribution along with pricing actions led to the growth in sales, offsetting the negative impact of material costs and currency. Excluding currency headwinds, revenues grew 4%.

The company exceeded $100 million in cost savings in 2016. McCormick plans to achieve approximately $100 million of cost savings in 2017. Further, it is on track to reach its four-year $400 million goal of cost savings by 2019.

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


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

Overall, McCormick remains focused on improving sales through acquisitions. The company expects strong sales momentum to continue in fiscal 2017. McCormick has been witnessing rising demand for spices, herbs and seasonings over the last few years, which is boosting sales. Product innovation, brand marketing support and expanded distribution, as well as pricing actions have also led to the growth in sales, offsetting the negative impact of material costs and currency. The company is largely banking on digital marketing to improve its portfolio of spices, to build consumer awareness and drive volume.

Its cost saving initiative is also appealing. The company expects currency headwinds to continue in 2017. However, earnings growth might get hurt by higher brand marketing expenses.

Zacks Rank and Key Picks

Currently, McCormick carries a Zacks Rank #3 (Hold).

Some better-ranked food stocks in the industry include Lamb Weston Holdings Inc. LW, ConAgra Foods, Inc. CAG and Ingredion, Inc. INGR.

Lamb Weston has long-term earnings growth rate of 3.24% and sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

ConAgra Foods and Ingredion, both carrying a Zacks Rank #2 (Buy), have growth rates of 8.00% and 11.00%, respectively.

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