McCormick (MKC) Tops Q2 Earnings On Acquisition & Volume

McCormick & Co. Inc. (NYSE:MKC) delivered modest results in the second quarter of fiscal 2016, where earnings beat the Zacks Consensus Estimate while revenues matched the same. The company reiterated its sales and earnings guidance for 2016.

Adjusted earnings of 75 cents per share beat the Zacks Consensus Estimate of 74 cents by 1.4%. However, it was flat year over year, as the favorable impact of higher sales and cost savings were offset by an increase in brand marketing and material costs, higher tax rate and currency headwinds.

Revenues and Profits

The global leader in flavors and spices delivered second quarter revenues of $1.063 billion, which came in line with the Zacks Consensus Estimate. Revenues grew about 4% from the prior-year quarter, driven by acquisitions, which added 3% to the sales increase. Product innovation, brand marketing support and expanded distribution, as well as pricing actions also led to sales growth, offsetting the negative impact of material costs and currency. Excluding currency headwinds, revenues grew 6%.

The company’s adjusted operating income grew 4.9% to $129 million in the second quarter. On a constant currency basis, it increased 7%, owing to higher sales and cost savings more than offsetting material cost inflation.

MCCORMICK & CO Price, Consensus and EPS Surprise

MCCORMICK & CO Price, Consensus and EPS Surprise | MCCORMICK & CO Quote

Segment Details

Consumer Business: Segment revenues grew 8% on a constant currency basis, driven by acquisition gains, increased volume, better product mix as well as pricing actions. Sales increased on a constant currency basis in all the regions of Americas, Europe, Middle East and Africa (EMEA), with a slight increase in Asia/Pacific.

On a constant currency basis, adjusted operating income rose 8% driven by the favorable impact of sales growth and cost savings more than offsetting the increase in brand marketing expenses and unfavorable impact of higher material costs.

Industrial Business: Segment revenues increased 3% year over year on a constant currency basis in the second quarter, driven by higher sales, improved volumes, higher pricing and improved product mix. Sales increased on a constant currency basis in all the regions of Americas, Europe, Middle East and Africa (EMEA) and the Asia/Pacific.

On a constant currency basis, adjusted operating income increased 5% year over year, as the favorable impact of higher sales and cost savings more than offset the unfavorable impact of increases in material costs and brand marketing expense.

Fiscal 2016 Guidance

The company has reaffirmed its earnings and sales growth outlook for 2016 and anticipates to achieve the higher end of the guidance owing to the Gourmet Garden acquisition (Apr 2016). Further, the company has raised its cost savings target.

The company continues to expect 2016 sales to grow in the range of 4% to 6% on a constant currency basis. Including the estimated impact of unfavorable currency rates, sales are projected to increase 1% to 3%.

The company expects 2016 adjusted operating income to grow in the range of 6% to 8%. This marks a 5% to 7% increase from adjusted operating income of $614 million in 2015. In constant currency, adjusted operating income is expected to grow 9% to 11%.

McCormick continues to expect 2016 adjusted earnings to be in the range of $3.68 to $3.75 per share, which marks an increase of 6% to 8% compared with $3.48 in 2015. On a constant currency basis, adjusted earnings are expected to grow in the range of 9% to 11%. The Zacks Consensus Estimate for fiscal 2016 stands at $3.73 per share, which is within the guidance.

The company has raised its 2016 cost savings target to a range of $100 million to $110 million, up from its prior estimate of at least $95 million, driven by significant productivity improvements, led by its CCI program.

Our Take

Overall, McCormick is focusing on building sales through acquisitions, and expects strong sales momentum to continue in fiscal 2016. Its cost saving initiative is also appealing. The company expects lower impact from currency headwinds in 2016. However, earnings growth is expected to be sluggish in the near term due to higher brand marketing expenses.

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

Stocks to Consider

Better-ranked stocks in the space include The J.M. Smucker Co. (NYSE:SJM) , Post Holdings, Inc. (NYSE:POST) and United Natural Foods, Inc. (NASDAQ:UNFI) . All of them sport a Zacks Rank #1 (Strong Buy).