McCormick (MKC) Up 12% In 6 Months: What's Driving The Stock?

McCormick & Company (NYSE:MKC) Inc. (NYSE:K) is offering investors a treat, courtesy of its spectacular earnings and sales history backed by well-chalked buyouts, robust savings efforts and effective marketing policies.

Evidently, shares of this seasonings, spices and specialty foods giant have returned 12.4% over the past six months, outperforming the industry’s decline of 1.2%. In fact, the company’s shares recently hit a new 52-week high of $111.46 during the trading session on Mar 12, eventually closing at $110.69.

Let’s take a closer look at the factors driving the company’s impressive performance and see if it can add new strides to its growth story in the forthcoming periods.

Acquisitions: A Vital Growth Driver

McCormick has been strengthening its presence through acquisitions to expand its portfolio. Notably, a number of companies operating in the food industry such as Campbell Soups (NYSE:CPB) , Kellog (NYSE:K) and Conagra Brands (NYSE:CAG) have been resorting to strategic buyouts and widen their prospects. In fact, McCormick’s acquisition of the food division of Reckitt Benckiser Group plc (RB Foods) in August 2017, is the largest deal till date. The deal has enabled the addition of iconic brands to McCormick’s portfolio, thereby positioning the company in the leading U.S. condiments category.

In the past, the company has made significant acquisitions, including that of Italy-based Enrico Giotti SpA (Dec 2016) and Australia-based Botanical Food Company (April 2016). Markedly, additional sales from buyouts of RB Foods, Giotti and Gourmet Garden contributed 6% to the company’s constant currency sales growth in fiscal 2017. Also, management expects additional sales from RB Foods to contribute 8% to fiscal 2018 sales growth.

Cost-Saving Efforts

McCormick focuses on saving costs and enhancing productivity through its ongoing Comprehensive Continuous Improvement (CCI) program. The program has enabled the company to increase investments, which lead to higher sales and profits. Notably, cost savings through CCI and streamlining actions reached $117 million in fiscal 2017, up from $109 million in fiscal 2016. McCormick is on track with its four-year targeted savings of around $400 million by November 2019. Notably, cost savings from CCI helped the company deliver double-digit adjusted operating income growth in the fourth quarter. The adjusted operating margin expanded 220 basis points (bps), marking the eighth consecutive quarter of margin improvement. Further, gross margin increased 180 bps in the fourth quarter and is likely to expand in a range of 150-20 basis points in fiscal 2018. The company projects adjusted operating income growth in the range of 23-25% in fiscal 2018, wherein it plans to achieve cost savings of $100 million.

Innovation & Inclination Toward Healthy Food Offerings

McCormick regularly enhances products through innovation to stay competitive and tap the evolving demand for new flavors, spices and herbs. Health and wellness continues to bolster the innovation agenda. The company is planning to offer innovative flavors in breakfast platform and ready-to-serve gravies. McCormick is also shaping up its portfolio with gluten-free, non-GMO and organic products to cater to the evolving needs of consumers. In 2016, the company renovated its core products, with non-GMO labeling on everyday spices and seasonings.

Escalated Costs a Worry

McCormick continues to incur higher raw material costs and witnesses increased brand marketing and freight expenses. Rising costs affected the company’s performance in the fourth quarter. In fiscal 2018, the company expects material costs to escalate in low-single digits. Further, McCormick is also planning to increase brand marketing expenses to drive sales.

Wrapping it Up

Although McCormick has been struggling against escalated expenses, we expect such downturns to be sufficiently cushioned by the company’s well-planned savings and efficiency building initiatives. Moreover, this Zacks Rank #3 (Hold) company’s rich portfolio of iconic brands combined with sustained efforts keeps it well positioned to achieve greater highs in the forthcoming periods

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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