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Why Is McCormick (MKC) Down 1% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for McCormick (MKC). Shares have lost about 1% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is McCormick due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

McCormick’s Q3 Earnings Beat Estimates, Sales Rise Y/Y

McCormick posted third-quarter fiscal 2019 results, wherein adjusted earnings of $1.46 per share improved 14% on a year-over-year basis and surpassed the Zacks Consensus Estimate of $1.29. The bottom-line growth was backed by increased adjusted operating income and reduced adjusted tax rate. However, foreign currency rates had an adverse impact on the bottom line.

This global leader of flavors and spices generated sales of $ 1,329.2 million that inched up close to 1% year over year, including currency headwinds of roughly 1%. The top line was mainly driven by growth at the Consumer Business segment. However, sales fell short of the Zacks Consensus Estimate of $1,336 million.

Gross margin expanded 100 basis points (bps) to 40.6% on the back of favorable mix and savings from the Comprehensive Continuous Improvement (CCI) program.

Adjusted operating income increased about 9% to $261 million, while it rose 10% at cc. Further, the adjusted operating margin expanded 160 bps to 19.7%. The upside can be accountable to savings from the CCI program, and improved sales and mix. This was somewhat countered by increased business transformation and brand marketing costs.

Segment Details

Consumer Business: Sales grew 3% to $794.2 million and rose 4% at cc on improvements in the Asia Pacific and the Americas regions. This, in turn, was driven by product introductions, enhanced distribution, and robust marketing and promotional plans. Sales in the Americas rose 4% at cc. This was mainly driven by volume growth and improved product mix. Sales in the Asia-Pacific region grew 15% at cc, mainly owing to solid performance in China. In the EMEA region, sales dipped 2% at cc due to unfavorable weather in Europe, adverse pricing and soft sales of private-label products.

Flavor Solutions: Sales in the segment dropped 2% from the prior-year quarter’s figure to $535 million. At cc, sales remained flat year over year as improved performance in EMEA was negated by weakness in Americas and the Asia Pacific. Sales in the EMEA region improved 4% at cc, driven by volume growth and favorable product mix. Sales in the Americas fell 2% at cc due to warehouse transition actions and adverse timing of product launches and promotions. Sales in the Asia-Pacific region edged down by 1% at cc due to unfavorable promotional timings and low-margin business exits.

Financial Update

McCormick exited the quarter with cash and cash equivalents of $162.9 million, long-term debt of $3,843.1 million and shareholders’ equity of $3,480.6 million. For the first nine months of fiscal 2019, net cash provided by operating activities was $494.6 million.

McCormick’s net debt-to-adjusted EBITDA ratio stood at 3.7x at the end of the reported quarter.

Fiscal 2019 Guidance

Management revised its outlook for fiscal 2019. The company now expects sales growth of 1-2% (up 3-4% at cc) compared with the previous guidance of 1-3% (up 3-5% at cc). It expects to achieve top-line growth completely on an organic basis, as it anticipates no benefits from acquisitions. That said, sales are likely to be driven by efforts like product launches, and expanded distribution and marketing. Also, strong pricing is expected to drive sales and counter elevated costs.

Incidentally, the company anticipates to achieve cost savings of almost $110 million in fiscal 2019, which will be utilized for enhancing margins, sponsoring growth-oriented investments and offsetting high costs.

Moreover, McCormick now projects adjusted operating income to grow 6-7% (8-9% at cc), while it was earlier expected to rise 6-8% (8-10% at cc). Adjusted earnings for fiscal 2019 are now projected to be $5.3-$5.35 per share, up from the previous guidance of $5.2-$5.3. The bottom line is expected to grow 9-10% at cc compared with 7-9% projected earlier.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month.

VGM Scores

At this time, McCormick has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

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 #2 (Buy). We expect an above average return from the stock in the next few months.



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