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It has been about a month since the last earnings report for McCormick (MKC). Shares have added about 0.2% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is McCormick due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
McCormick's Q1 Earnings Beat Estimates, Sales Up Y/Y
McCormick posted first-quarter fiscal 2021 results, with the top and the bottom line surpassing the Zacks Consensus Estimate. Moreover, sales and earnings increased year over year, reflecting strength across both the segments. Also, management increased its fiscal 2021 outlook.
Quarter in Detail
Adjusted earnings of 72 cents per share increased 33% from 54 cents reported in the year-ago quarter, mainly due to increased adjusted operating income. This was somewhat offset by rise in adjusted income tax rate. Moreover, the metric beat the Zacks Consensus Estimate of 57 cents per share.
This global leader of flavors and spices generated sales of $1,481.5 million, up 22% year over year. This includes favorable impact from currency translation of 2%. The uptick was driven by sales growth in both the segments. On a constant-currency (cc) basis, sales surged 20% on the back of strength in both the segments. Moreover, sales in the quarter surpassed the Zacks Consensus Estimate of $1,384.9 million.
Gross profit margin expanded 20 basis points to 39% on the back of favorable product mix and cost savings from the Comprehensive Continuous Improvement (CCI) program. These were partially negated by pandemic-induced costs among others. Operating income rose from $194 million to $236 million during the quarter. The upside can be attributed to increased sales as well as gross margin expansion. However, increased brand marketing expenses as well as some transaction and integration expenses were a drag on the metric.
Consumer: Sales increased 35% (up 32% in cc) to $946.8 million, with the Cholula buyout contributing 3% to growth. The segment gained on the back of sustained shift to cook-at-home trend amid the pandemic. Sales in the Americas surged 30% owing to growth across most categories and brands, especially strength in the McCormick, French's, Frank's RedHot, Zatarain's, Lawry's, Simply Asia and Gourmet Garden brands as well as Cholula acquisition gains. In the Europe, Middle East and Africa (EMEA) region, sales increased 34% on the back of double digit growth across all countries and categories, with particular strength in branded spices and seasonings as well as homemade dessert products. Further, sales in the Asia-Pacific region rallied 65% driven by recovery in consumption across China. Also, double digit growth in the region, thanks to at home and away from home products led to this increase.
Flavor Solutions: Sales in the segment increased 4% (up 3% at cc) to $534.7 million from the prior-year quarter’s figure to $512.5 million, driven by sales growth from packaged food companies which was somewhat offset by reduced demand from restaurant and other foodservice customers, primarily in the Americas and EMEA regions. Also, contribution from acquisitions was a driver. Sales in the Americas increased 2%, while the metric inched up 1% in the EMEA region. Sales in Asia-Pacific region rose 26% driven by increased sales to quick service restaurants in China and Australia.
McCormick exited the quarter with cash and cash equivalents of $256.1 million, long-term debt of $4,739.2 million and total shareholders’ equity of $4,164.7 million. For the three months ended Feb 28, net cash used by operating activities was $32.2 million.
Fiscal 2021 Outlook
Based on the strong first-quarter performance as well as the favorable impact of its recent bond issuance to optimize its long-term financing, management has raised its sales, operating income and earnings per share (EPS) view for fiscal 2021. Additionally, the company continues to anticipate a two-percentage point positive impact from currency rates on these metrics during fiscal 2021.
The company now expects to achieve sales growth of 8-10% (up 6-8% at cc) compared with the prior-year’s figure. Earlier, management had expected to achieve sales increase of 7-9% (up 5-7% at cc). The view takes into account additional impact of the Cholula and FONA buyouts. Moreover, the company expects to witness organic sales growth in both the segments, backed by new products, brand marketing, category management as well as differentiated customer engagement. Apart from this, management expects to see sustained shift in consumer demand to at-home consumption when compared with the pre-pandemic levels. It also expects to see gradual recovery in the demand from restaurant and other foodservice customers.
Further, adjusted operating income is now expected to increase in the band of 9-11% (up 7-9% at cc). Earlier, the metric was projected to grow in the band of 8-10%, (up 6-8% at cc). Adjusted EPS are now expected in the range of $2.97-$3.02, reflecting a rise of 5-7%. Earlier, management had expected the metric to be in the range of $2.91-$2.96. The outlook suggests solid growth in base business as well as contributions from acquisitions. This is likely to be somewhat offset by impact from incremental 2021 business transformation and pandemic-related costs among others.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -5.43% due to these changes.
At this time, McCormick has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, McCormick has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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