A month has gone by since the last earnings report for McCormick (MKC). Shares have added about 7.9% in that time frame, outperforming 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 catalysts.
McCormick's Q3 Earnings In Line, Sales Miss Estimates
McCormick posted third-quarter fiscal 2018 results, wherein earnings were in line with the Zacks Consensus Estimate, while sales missed the same. Nevertheless, the top and the bottom lines improved year over year. The quarterly results benefited from growth in segments as well as improved margins.
Adjusted earnings of $1.28 per share were in line with the Zacks Consensus Estimate. Adjusted earnings were almost 14.3% higher year over year, owing to increased adjusted operating income and favorable impacts from adjusted income tax rate. These were somewhat offset by increased interest expenses and outstanding shares. Foreign currency rates had an unfavorable impact on the bottom-line performance.
Revenues & Profits
In the quarter under review, McCormick, the global leader in flavors and spices, generated sales of $1,345.3 million. The top line grew almost 13.5% from the prior-year quarter’s figure, owing to robust performance witnessed across the consumer and flavor solutions units along with minimum impacts from currency. Encouragingly, the acquisition of Frank’s and French’s brand boosted sales by 10%. On a constant-currency (cc) basis, sales grew close to 13.6%. However, reported sales for the third quarter missed the Zacks Consensus Estimate of $1,351 million.
Gross profits in the third quarter rose 22.8% to $594.9 million. Gross margin came at 44.2%, expanding 330 basis points (bps) from the prior- year quarter’s figure. The upside can be primarily attributed to the company’s shift to more value-added products, including Frank’s and French’s portfolio and savings from the CCI program. On an adjusted basis, gross margin improved 280 bps.
Adjusted operating income grew almost 18.7% to $241.9 million in the quarter under review. At cc, adjusted operating income increased 19.5%. Further, adjusted operating income margin came in at 18%, depicting growth of 80 bps.
Consumer Business: Sales grew almost 13.5% to $790.8 million. At cc, sales improved 13.4%. The upside was mainly driven by growth in the Americas and the Asia/Pacific regions.
Sales in the Americas, was mainly driven by gains from the buyouts of Frank's and French's brands. Further, favorable pricing across several product lines and improved volumes aided the category’s performance in the region. Sales in the Asia/Pacific region were driven by growth in China. Nevertheless, the category’s performance was dismal in the EMEA region, owing to category slowdown.
Flavor Solutions: Sales in the segment grew 13.5% from the prior-year quarter’s tally to $ 554.5 million. At cc, sales increased 14% on improved performance in the Americas and the EMEA regions.
Sales in the Americas gained from Frank's and French's buyout as well as higher sales to quick service restaurants and increased sales of flavors. Sales in the EMEA region were partly driven by Frank's and French's brands. It was also backed by the impact from a global realignment of a major customer's sales from the Americas. Sales in the Asia/Pacific region declined, due to the exit of lower margin business and timing of promotional activities.
McCormick exited the quarter with cash and cash equivalents of $73 million, long-term debt of $4,269.8 million and shareholders’ equity of $3,112 million.
During the quarter, net cash provided by operating activities were $389 million, up 28.4% from $303 million in the prior-year quarter. The rise stemmed from net income growth.
Fiscal 2018 Guidance
Management is pleased with the company’s third-quarter performance with strong results in the company’s consumer business and flavor solutions segments. Acquisitions as well as enhanced sales of the company’s seasonings and flavor brands aided performance across key geographical regions. Moreover, the company is on track with cost-saving initiatives under the CCI program and plans to achieve a target of $105 million in fiscal 2018. These savings will be utilized for offsetting higher costs as well as to make investments in brand marketing and margin improvement measures.
Going ahead, management stated that it expects less favorable impacts from foreign currency rates and accordingly updated sales projections for fiscal 2018 view. The company expects sales to grow in the bracket of 12-14%, reflecting a decline from the previous projection of growth in the range of 13-15%. Further, management expects sales during the fiscal year to gain from acquisitions, new products, expanded distribution network and brand marketing.
Earnings for fiscal 2018 are now expected in the range of $4.95-$5.00, reflecting a rise from the earlier view of $4.85-$4.95. The revised guidance depicts a growth of 16-17% from the prior-year quarter’s adjusted earnings of $4.26. The updated view takes into consideration positive impacts from reduced adjusted tax rates and minimal impacts from currency. Also, the company anticipates strong cash flow for 2018.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates.
At this time, McCormick has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. However, 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 D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise 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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