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Why Is McCormick (MKC) Down 7.4% Since Last Earnings Report?

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Zacks Equity Research
·5 min read
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It has been about a month since the last earnings report for McCormick (MKC). Shares have lost about 7.4% 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 catalysts.

McCormick's Q4 Earnings Miss Estimates, Sales Up Y/Y

McCormick posted fourth-quarter fiscal 2020 results, with the top and the bottom line missing the Zacks Consensus Estimate. Moreover, earnings declined on a year-over-year basis. Nevertheless, sales increased on the back of strength in both the segments.

Quarter in Detail

Adjusted earnings of 79 cents per share declined from 81 cents reported in the year-ago quarter, mainly due to reduced adjusted operating income.This was somewhat offset by lower interest expenses. Moreover, the metric missed the Zacks Consensus Estimate of 81 cents per share.

This global leader of flavors and spices generated sales of $1,557.9 million, up 5% year over year and including favorable impact from currency translation of 1%. The uptick was driven by sales growth in both segments. On a constant-currency (cc) basis, sales increased 4% on the back of strength in both the segments. However, sales in the quarter missed the Zacks Consensus Estimate of $1,583 million.

Gross margin came in line with the year-ago quarter’s level at 42.4%. Notably, cost savings from the Comprehensive Continuous Improvement (CCI) program was completely offset by coronavirus-induced related costs and higher transportation expenses.

Adjusted operating income declined 4% to reach $290 million due to increased planned brand marketing investments, pandemic-induced expenses and increased employee benefit expenses. Nevertheless, increased sales and savings from CCI program offered some respite. Also, the adjusted operating margin came in at 18.6%, down from 20.4% reported in the year-ago quarter.

Segment Details

Consumer: Sales increased 6% (up 5% in cc) to $1,023.7 million. The segment gained on the back of higher demand stemming from increased cook-at-home trend in the Americas and Europe, Middle East and Africa (EMEA) regions. Sales in the Americas rose 6% owing to growth in several brands especially strength in Lawry's, Frank's RedHot, French's, Zatarain's, Simply Asia and Thai Kitchen. In the EMEA region, sales increased 15% on the back of broad-based growth, with particular rise in branded spices and seasonings and homemade dessert items. However, sales in the Asia-Pacific region declined 7% due to softness in products related to away from home consumption.

Flavor Solutions: Sales in the segment increased 3% from the prior-year quarter’s figure to $534.2 million, driven by growth across all three regions. Sales in the Americas inched up 1% thanks to increased sales to packaged food companies. This was somewhat offset by reduced revenues from quick service restaurant and branded foodservice customers. Sales in the EMEA region increased 7%, while sales in Asia-Pacific region rose 11% driven by increased sales to quick service restaurants in China and Australia.

Financial Update

McCormick exited the quarter with cash and cash equivalents of $423.6 million, long-term debt of $3,753.8 million and total shareholders’ equity of $3,940 million. For 12 months ended Nov 30, net cash provided by operating activities was $1,041.3 million.

2021 Outlook

The company expects to achieve sales increase of 7-9% (up 5-7% at cc) compared with the prior-year’s figure. Growth is expected to be organic in both the segments, backed by new products, brand marketing, category management as well as differentiated customer engagement. Also, the growth projection takes into account additional impact of the Cholula and FONA buyout. Moreover, the company expects at-home consumption trends to remain favorable owing to the ongoing pandemic. It expects to see gradual rebound in the demand from restaurant and other foodservice customers.

Further, adjusted operating income is expected to increase in the band of 8-10%, (up 6-8% at cc) compared with the prior-year quarter’s figure. Adjusted earnings per share are expected in the range of $2.91-$2.96, reflecting a rise of 3-5% (up 1-3% at cc). The outlook reflects solid growth in base business as well as contributions from acquisitions 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, fresh estimates have trended downward during the past month.

VGM Scores

Currently, McCormick has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, 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 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 this revision has been net zero. 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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